CASE STUDY: PLYMOUTH COUNTY, MASSACHUSETTS

In the colonial period, British mercantilist policies forbade the formation of banks in America.Footnote ⁷ As a result, credit was extended through a hierarchy of relationships. Farmers purchased imported goods on credit from local merchants. These merchants, in turn, imported the goods on credit from British merchants. The Revolutionary War changed this credit structure and interrupted credit flows, at least temporarily, in the United States.Footnote ⁸ After the war, Americans were no longer under the fetters of British policies, and merchants soon initiated efforts to organize banks.

In the early nineteenth century, New England and the Mid-Atlantic region were the first to open up to banking.Footnote ⁹Figure 1 compares the numbers of banks in Massachusetts, Pennsylvania, and New York. It shows that before 1840, Massachusetts had the largest number of banks.Footnote ¹⁰ After the free banking act of 1838, New York surpassed Massachusetts to become the state with most banks. Even so, Massachusetts was still among the states with the highest bank credit per capita, second only to Rhode Island.Footnote ¹¹

Figure 1

NUMBER OF BANKS FOR MASSACHUSETTS, NEW YORK AND PENNSYLVANIA, 1783–1861

Source: Weber, “Balance Sheets.”

Despite their rapid expansion, banks did not spread evenly over Massachusetts. Within the state, the number of banks varied significantly across counties. Suffolk County and Essex County had multiple banks as early as the 1790s—thanks to the two cities (Boston and Salem, respectively) within them. By 1830 Boston had 17 banks and Salem six.

This concentration of banks was by no means common among Massachusetts's towns and cities, as only seven townships had multiple banks.Footnote ¹² Overall, the growth of banks at the state level penetrated into towns gradually; as of 1820, nine out of the 13 counties in Massachusetts had no more than one bank.

This article uses data from Plymouth County, Massachusetts to analyze the impact of bank entry. Plymouth County is located between Norfolk and Barnstable Counties, facing the Cape Cod Bay, with Bristol County to the west. The eastern part of the county, like other eastern counties in Massachusetts, underwent commercialization, with Plymouth being the regional trade center. The western side of the county, especially Middleborough and Bridgewater, was mainly agricultural. Despite being one of the earliest settlements in North America, Plymouth in the early nineteenth century was in the shadow of the urban center of Boston. Thus, the county as a whole engaged in a variety of economic activities.

TABLE 1Table 1 lists the number of individuals in major sectors of the economy according to the 1820 Federal Census. Suffolk County, which includes Boston, had very little farming. Its main economic activities were commerce and manufacturing. Barnstable County, just south of Plymouth County, engaged primarily in commerce with relatively few other activities. The western Massachusetts counties were mostly agricultural. The industry mix of Plymouth County reflected those of the neighboring counties; it was almost identical to that of Massachusetts as a whole. The diversity in occupations allows us to examine credit market behavior both within and among different groups. Moreover, there was only one bank in Plymouth County between 1803 and 1828; the Plymouth Bank did not face any direct competition in the same town until 1833. This pattern of geographical distribution of banks was also common among nonurban areas. Thus Plymouth County offers an opportunity to investigate the role of banks in a less urban setting with a variety of economic activities.

Table 1

OCCUPATIONAL DISTRIBUTION OF SELECT COUNTIES IN MASSACHUSETTS, 1820

Source:

1820 U.S. Federal Census

DATA SOURCES

The main data sources for the study are Plymouth Bank Records and Plymouth Court Records, along with 1820, 1840, and 1850 Federal Censuses. Plymouth Bank records started with the bank's founding in 1803. The discount books provide the most detailed information on the lending practice of bank; those for 1803 to 1833 and for 1844 to 1849 survived. Early banks, such as the Plymouth, used discounts as the principal way to extend credit. The presenter brings a note, usually either a promissory note or a bill of exchange, to the bank. The bank then discounts the note and gives the presenter the net amount due in the form of bank notes. The bank opened for discounts once a week between 1803 and 1833, and charged 6 percent interest rate with no exception. This was in accordance with the usury law in Massachusetts.Footnote ¹³

The second source is the Plymouth Court Records; these records document all court cases at the county level, from the seventeenth century to 1859. The complete records include all cases presented in the Court of General Sessions and the Court of Common Pleas. In the records of the Court of Common Pleas, an overwhelming majority of cases were debt litigation. A typical records entry includes the name and occupation or social status of both parties, amount of debt under dispute, the terms of the loan (interest, due date, and instrument used), the court's judgment, cost of the litigation, and notes on enforcement.Footnote ¹⁴

The Court Records provide us a glimpse of credit relationships in early periods, though it is obviously a biased sample. The cases in Plymouth Court Records represent only alleged defaults, which presumably constituted only a small subset of existing credit relationships. The personal credit market behind the court cases may have been very extensive indeed. In addition, one can easily imagine that not all defaults were brought to court. Creditors could utilize other mechanisms (such as renegotiation) to resolve issues. Nevertheless, these court cases show that there existed a credit system long before the emergence of Plymouth Bank. The occupational composition of borrowers in the court records presents a yardstick for evaluating bank credit access.

A third source of the data is the population census of 1820, 1840, and 1850. These are mainly used to identify the borrowers' occupations. A combination of the three set of records allows a more detailed analysis of lending practices and bank credit availability.

ANALYSIS OF DISCOUNT RECORDS

Analysis on Discount: Occupational Distribution, 1803–1833

The diversity of economic activities in Plymouth County reflects the burgeoning New England economy. To evaluate the contribution of early banks in the process, it is crucial to examine their lending practices. The first column of Table 2 presents the distribution of discounts by occupation between 1803 and 1833.Footnote ¹⁵ Over 60 percent of all discounts in the sample were to merchants.Footnote ¹⁶ If combined with the discounts to gentlemen and esquires, this number increases to over 75 percent. This shows that, consistent with Lamoreaux's findings, the bank in this period served mainly the economically prosperous classes. The lending pattern also reflects the composition of stockholders: merchants held about 55 percent of the initial stock of the bank.

Table 2

FREQUENCY OF OCCUPATION/STATUS FROM PLYMOUTH BANK AND PLYMOUTH COURT RECORDS, 1803–1833 AND 1844–1849

Sources:

See the text.

During the early nineteenth century, the real-bills doctrine was the orthodoxy in bank lending practices. According to the doctrine, banks should finance only short-term commercial activities.Footnote ¹⁷ By this standard, the lending practices of the Plymouth Bank deviated from the real-bills ideal. Out of the total of 17,053 loans, only 362 were short-term commercial loans. The vast majority of loans were longer-term accommodation loans. Merchants presented 89 percent of the commercial paper for discount; they also received over 59 percent of the accommodation loans. The dominant presence of merchants in the lending profile of the Plymouth Bank applies for both accommodation and commercial loans.

Despite being the largest group of borrowers, not every merchant in the county had access to banks. This can be shown by comparing the court and bank records. Between 1803 and 1833, approximately 275 different merchants brought suit in the sample of the court records.Footnote ¹⁸ In the same period, only 49 of these merchants received discounts from the bank. Thus, even within the merchant class, the bank still lent very selectively.

It is not surprising that the bank had such ability to differentiate good borrowers from bad ones. The directors of banks were either lawyers or big merchants. They maintained social ties and relationships with locals through repeated interactions. Both professions would possess a large amount of information about the potential borrowers, either through commercial transactions or litigation. Thus banks usually had the ability to evaluate a potential borrower's credit-worthiness.Footnote ¹⁹

Table 2 also compares the occupational distribution from the two records in the same period. Note that in the period under inspection, very few cases involved any bank, again evidence for the prudent discounting policy. Therefore, bank discounts and transactions represented in court cases had very little overlap. The figures indicate a significant difference between the composition of borrowers from the bank and that in the court cases. If no specific group was more likely to bring disputes into court, the data translates into a major distinction in bank credit and personal credit. Namely, farmers and artisans did not have easy access to banks. They usually borrowed in the personal credit market. Their presence in the court records shows that they did have a demand for credit; however, they did not gain access to bank credit.

This simple comparison, however, must survive further scrutiny. The obvious issue is sample selection bias in court records. Defaults represented only a small portion of all credit transactions. Even when faced with default, not every creditor pursued court actions. One could argue that merchants may have been less likely to appear in courts for debt cases. Reputations and informal sanctions could have played a key role. If this were the case, a low percentage of merchant defendants does not necessarily translate to a small amount of merchant borrowing. It could simply mean that they either had lower default rates because of the reputation mechanism or there were other means of default resolution. Both factors could contribute to the low percentage of merchants as defendants.

Nonetheless, in a local economy in early-nineteenth-century America, farmers and artisans also had repeated contacts with other potential lenders or borrowers. It was true that merchants had close relationships in business; farmers, however, also maintained close relationships with local country stores because the latter provided them credit and outlets for agricultural output.Footnote ²⁰ Therefore, the use of informal enforcement was not restricted to merchants. Moreover, merchants formed the largest group of plaintiffs, making up more than 27 percent in all litigation. In fact, using the same court records, William E. Nelson found that the commercial center in the county, the Town of Plymouth, had a much higher rate of litigation.Footnote ²¹ These intratown suits were usually brought about by a small group of “litigious” individuals, usually merchants, and suggest that merchants may have been more prone to litigate. The evidence is not, however, definitive, as merchants were likely to engage in many more credit transactions, and so it is possible that they resolved a portion of their debt disputes by other means.

Another potential issue is the discrepancy in geographical representation of bank records and court records. The bank lent mostly to individuals in the town of Plymouth, which, as a commercial center, had more merchants than other regions. The court records, on the other hand, represent the defaults of the whole county. If this was the sole explanation, once we restrict the samples to the town of Plymouth, the gap would vanish. The result, however, shows otherwise. If we consider only the residents of Plymouth, about 70 percent of the bank's discounts were to merchants. In the court records, only about 8.5 percent of the defendants were merchants, with farmers and artisans making up 20.7 percent and 21.7 percent, respectively. Even if one categorizes all gentlemen as merchants, this would still only account for 31 percent of the cases.

The difference presented in Table 2 is indeed striking. Farmers had very limited presence in the discount records of the bank—only slightly more than 8 percent. The number is fairly close to the 10 percent stipulated for agricultural and manufacture loans in the bank charter. The fact that such a stipulation appeared in the charter evidently reflects the expectation that contemporary banks would be reluctant to extend credit to people other than the wealthy. These pieces of evidence are consistent with a discrepancy in borrowers between bank and personal credit.

Discount Amounts

A further distinction between bank credit and personal credit is in the size of loans. The comparison between the amounts of loans from the bank and those in court cases provides a sharp contrast. Between 1803 and 1833, the discount amounts from the bank were much higher than those in the debt cases. The average of the former was $820.50 and the latter $140.10. As court cases only consisted of defaults, they invariably provide a biased sample. Two major reasons may create an upward bias: First, the law stipulated that all debt cases involving less than $4 were under the jurisdiction of local Justice of the Peace. Therefore, the Court of Common Pleas would only deal with loans of at least this amount. Second, the cost of litigation may have deterred some smaller creditors from resorting to the court. With such upward bias, the gaps in loan sizes appear all the more significant. One important qualification, however, is the fact that the personal credit market and the bank had distinct clienteles. Therefore, it may very well be that the merchants, who borrowed from the bank frequently, simply needed larger loans. This may be the driving force of such distinctions.

In order to control the selection problem of the borrower, I matched all the names that appeared in both records. Out of all borrowers in the bank's loan records from 1803 to 1833, 53 also appeared in debt litigation as defendants. Table 3 reports the mean amounts for the same group of borrowers in the court records and bank discount books.Footnote ²² The same group of borrowers would borrow greater amounts from the bank than from individual personal credit markets. Even if one compares the average amount year by year, the same results still hold.

Table 3

COMPARISON OF AMOUNTS BETWEEN COURT AND BANK RECORDS, CONTROLLING BORROWERS

Sources:

Konig, Plymouth Court Records and Historical Collections.

It is not surprising that banks were able to lend out greater amounts. After all, the banks gathered the financial resources of many investors. Individual moneylenders or shopkeepers, no matter how successful, only had limited financial resources of their own. Even if they possessed substantial assets, they would not be willing to lend a great amount to one single borrower, for the simple reason of risk: if the borrower failed, a great portion of their wealth would be in jeopardy. On the other hand, banks had a much larger pool of capital. This enabled them to diversify successfully even though the amount of each discount was large. It was in this respect that the bank provided a unique service.

DISCOUNT DATA, 1844–1849

In the early years of the bank, most discounts went to local merchants. Over the years, however, textile mills sprung up in New England, and artisans and small manufacturers constituted a growing share of the population. Other financial intermediaries, including new banks and savings banks, also emerged after 1828 in Plymouth County. Scholars, such as John Wallis, regard Massachusetts as the earliest free-banking state.Footnote ²³ Although Massachusetts did not establish de jure free banking until 1851, the relative ease of acquiring bank charters made it de facto free banking. The literature in political history indicates that the antimonopoly sentiment of the Jacksonian era imposed pressure on states. The Massachusetts Banking Act of 1828 embodied this political atmosphere.Footnote ²⁴ Overall, de facto free banking translated to a great number of small banks in Massachusetts. The policy also affected Plymouth County, where two new banks (Hingham Banks and East Bridgewater Bank) were chartered in 1828. Both were at the northern part of the county. However, neither started operations until after 1833. In 1832 Old Colony Bank acquired its charter in the town of Plymouth. It began its operation within a year. Two more banks (Duxbury Bank and Wareham Bank) also received charters in 1833.

ANALYSIS OF DISCOUNTS, 1844–1849

The change in the banking environment provides an interesting case for comparing banking practices. The last three columns of Table 2 present the occupational breakdowns for bank loans and both parties in debt litigation between 1844 and 1849. In this period, the proportion of bank loans to merchants declined, while it increased for farmers and artisans. The annual distributions of borrower occupations remained stable within the two periods, but were strikingly different between them. Between 1803 and 1833, the loans to merchants consistently constituted approximately 60 percent of total loans, whereas between 1844 and 1849, this percentage hovered around 25 percent.

In addition to the occupational breakdown, the concentration of borrowers also changed significantly. In order to make the proper comparison, I sampled the years 1827 to 1832 and the years 1844 to 1849. Between 1827 and 1832, 102 borrowers discounted a total of 1,488 times, averaging 14.59 times per person. In the latter period, 820 borrowers presented 3,139 discounts, averaging 3.83 times per borrower. This suggests that by 1844, the body of borrowers were more dispersed than in the earlier period.

Another noticeable change is the increasing presence of commercial paper in discounts. A good indication would be the frequency of renewals. Between 1844 and 1845 about 23 percent of all discounts were not renewed so they were likely to have been commercial paper. Although the Plymouth Bank was never the idealized real-bills bank, the growth of shares of commercial paper from 2 to 23 percent was still significant.Footnote ²⁵

The size of loans also provides evidence on the change in borrower composition. The average amount between 1803 and 1833 was $820.50, with a median of $500. In the latter period, the average amount was $496.64, with a median of $274.84.Footnote ²⁶ Despite some fluctuations from year to year, the amount lent was always much lower in the latter period. Most of the small loans went to artisans. Table 4 lists the occupational distribution by quartiles of loan sizes between 1844 and 1849. For the first quartile, artisans and farmers received over 56 percent of total loans. This percentage drops monotonically by quartile as loan size increases. In comparison to previous years, Plymouth Bank shifted towards smaller loans, and broadened its lending to artisans.

Table 4

OCCUPATIONAL BREAKDOWN BY QUARTILES OF AMOUNT LENT, 1844–1849

Note:

First quartile = 139.9; median = 244.8; third quartile = 500.

Sources:

Historical Collections.

From this analysis, one can conclude that the Plymouth Bank underwent considerable changes in lending practices over the first half of the nineteenth century. Before 1833 over 60 percent of loans were to merchants; whereas artisans made up less than 4 percent of all loans. After 1844 the share of loans to artisans increased sharply and was almost on par with loans to merchants. What caused this change?

One candidate would be a shift in economic structure. The first half of the nineteenth century was an era of rapid industrialization in New England. The changing economy of Plymouth County was a part of the broader transformation toward industry in the region. Thus the lending patterns of banks might have simply reflected this transition. Table 5 compares the percentage of population in different sectors between 1820 and 1840, using Census data. The share of the population engaging in manufacture increased by more than 10 percentage points. However, such changes do not mirror the dramatic increase in loans extended to artisans. The change in economic structure was not nearly as abrupt as the change in borrowers; instead, census records suggest that the structural shift was relatively gradual. Therefore, economic transformation cannot be the primary factor in explaining the change in borrower profiles.

Table 5

OCCUPATIONAL DISTRIBUTION, PLYMOUTH COUNTY, 1820 AND 1840

Note:

The definition of “people engaging in commerce” changed between 1820 and 1840. In 1820 it included people engaging in navigation, but in 1840 these individuals were in a separate category. To make the numbers comparable I included sailors and mariners in people engaging in commerce.

Sources:

Historical Census Browser.

Another potential explanation was the changes in loan rates. According to Hugh Rockoff, although Massachusetts did not repeal its usury law until 1867, the penalty for charging usurious interest decreased over time. Howard Bodenhorn found that in Black River Bank of New York, the bank could choose to violate the usury law when necessary. Evidence from Plymouth Bank between 1844 and 1849 suggests similar behavior. In this period, about 4.7 percent of loan rates rose above the interest ceiling. However, the violation of usury laws does not explain the broadening of credit to artisans. If the lax enforcement of usury laws caused the expansion of credit access, a majority of those loans should have been made to artisans. Instead, the occupational distribution of these usurious loans was similar to that of regular loans. Moreover, only 37 out of the 172 usurious loans were to first-time borrowers. Other possibilities, such as changes in regulations on banks, similarly fail to explain the observed change.Footnote ²⁷ In the following sections, I argue that it was the introduction of competition that opened up access to bank credit.

COMPETITION AND LENDING PATTERNS OF BANKS

Evidence on Credit Rationing

Joseph Stiglitz and Andrew Weiss show that credit rationing can exist in equilibrium in the presence of asymmetric information. Banks had incentives to carefully assess the credit-worthiness of individual borrowers to avoid default risks. Collecting information on some borrowers, however, could be costly. When this information cost outweighed the potential profit opportunity for the bank, these borrowers were likely to be denied loans. The end result was, effectively, credit rationing and financial repression. Moreover, the usury law was still in place. Between 1803 and 1833, the Plymouth Bank lent at the usury ceiling without exception. Therefore, the lending pattern of Plymouth Bank in this period strongly suggests the existence of credit rationing.

If the interest rate ceiling were at or close to the market-clearing rate, the new entrant would lower the market interest rate. If not, the new entrant should have been able to absorb the excess demand for credit at the interest rate ceiling, albeit at a somewhat higher risk. In other words, there would be enough demand to support both the incumbent and the entrant. Evidence from bank balance sheets shows that both Plymouth Bank and its direct competitor, Old Colony Bank, remained profitable. Both banks paid dividends consistently. Although profitability figures provide preliminary evidence on credit rationing, a few caveats remain. First, one cannot know the counterfactual; Plymouth Bank might have made more profits were it not for the new entrant. Second, the profitability of the new entrant could also be affected by cyclical factors. Figure 2 shows the net profit of the two banks in Plymouth County.Footnote ²⁸ There was indeed a profitability surge around 1832, when the Old Colony Bank began its operation. However, for Plymouth Bank, the surge started before 1832. Figure 2 also shows the dividend for both banks. Overall, the profit of the banks fluctuated significantly over the latter period. Nevertheless the banks were able to issue dividends at a fairly constant rate, with the exception of 1837. Despite fluctuations, the banks were in general profitable.

Figure 2

PROFIT AND DIVIDEND FOR PLYMOUTH AND OLD COLONY BANKS

Source: Weber, “Balance Sheets.”

COMPETITION IN THE CREDIT MARKET: IMPACT OF NEW ENTRY

Lack of information on the lending profiles of Old Colony Bank made it difficult to know the exact extent to which the entrant eroded the clientele base of the Plymouth Bank. However, anecdotal evidence suggests that some clients of the Plymouth Bank switched to the new entrant.Footnote ²⁹ Looking at the petitioners and their relationship with the Plymouth bank also shed some light on how the new banks brought competition. For the new banks outside of the town of Plymouth, only one petitioner borrowed from Plymouth Bank. All others never appeared in the sample in the discount book. Meanwhile, five out of seven petitioners of Old Colony Bank had previously discounted at the Plymouth Bank. Two of them, John B. Thomas and James Spooner had more than ten entries in the discount records of the Plymouth Bank between 1803 and 1833. Neither appeared in the discount records between 1844 and 1849. Although the 1850 census indicated that they were alive throughout the period. Out of the seven original petitioners of Old Colony Bank, only one had discounts at Plymouth Bank after 1844. The missing records between 1833 and 1844 prevent one from further looking into this issue. However, judging from the lending pattern of contemporary banks, it was hardly surprising that the insiders of new banks did not discount at the existing banks.

At the aggregate level, total loan amounts for both banks also illustrate the impact of new entrant. Figure 3 plots the total loans for both Plymouth Bank and Old Colony Bank. Between 1833 and 1835, the assets of Plymouth Bank dropped. This could very possibly be the effect of Old Colony Bank taking away the old customers. In any case, the entry of Old Colony Bank took away part of the reliable customer base at the Plymouth Bank. However, after a few years, Plymouth Bank was able to recover. Its total loans went back to its original level around 1836 and 1837, only to take another hit during the Crisis of 1837.

Figure 3

TOTAL LOANS AND DISCOUNTS FOR PLYMOUTH AND OLD COLONY BANKS, 1820–1850

Source: Weber, “Balance Sheets.”

As the result of opening up competition, the incumbent, Plymouth Bank, faced increasing competitive pressure from the new entrant. In reaction to the changes, the bank reached out to the rising class of artisans and small manufacturers. This is evident in the wake of the Crisis of 1837. If Plymouth Bank only pursued existing borrowers, one would expect that in the aftermath of the crisis, those who endured should be the long-term borrowers. Consequently, the borrowers should have consisted mostly of a small group of insiders. Yet this was not the case, according to my data. The period of 1844 to 1849 saw a dramatic increase in the number of borrowers from the bank. In addition, they were also more likely to borrow smaller amounts. Thus the introduction of competition drove the bank to extend loans to the artisan population.

These results resonate with the literature of credit markets. According to Levine, banks enjoy an advantage in information acquisition.Footnote ³⁰ In early American banking, Robert Wright argues that banks, through specialization of extending loans, became better at distinguishing the good borrowers from the bad one.Footnote ³¹ As merchants organized the Plymouth Bank, the bank was likely to possess private information on merchants. Hence it was not surprising that they constituted the majority of loans in the early years of the bank. With the erosion of clientele from competition, Plymouth Bank could no longer rely solely on the existing insiders. Meanwhile, as the bankers gained experience in extending loans, they became better in selecting potentially successful artisanal activities. As a result, more new customers had the opportunity to establish long-term credit relationships with the bank. Thus an expansion of clientele for Plymouth Bank ensued.

A formal test of this hypothesis is beyond the scope of the current article; however, other research confirms the existence of such a learning mechanism. For example, Bodenhorn shows that individual borrowers were willing to tolerate less favorable loan terms in order to build up long-term relationship with banks.Footnote ³² In other research I show that banks could learn to lend by accumulating private information on borrowers.Footnote ³³ Both studies imply that it was possible for antebellum banks to learn from experience and thereby extend credit to a broader group of clientele.