An outpouring of recent theoretical and empirical research places financial intermediaries center stage in the process of economic growth. Through their dealings with customers as depositors, borrowers, entrepreneurs, and shareholders, financial intermediaries have an advantage over other market participants in gathering and evaluating information on the likely success of many entrepreneurial projects. Despite this outpouring of work on the connection between aggregate economic activity and total financial intermediation, less attention has been paid to whether there is a best type of banking. ... More

An outpouring of recent theoretical and empirical research places financial intermediaries center stage in the process of economic growth. Through their dealings with customers as depositors, borrowers, entrepreneurs, and shareholders, financial intermediaries have an advantage over other market participants in gathering and evaluating information on the likely success of many entrepreneurial projects. Despite this outpouring of work on the connection between aggregate economic activity and total financial intermediation, less attention has been paid to whether there is a best type of banking. Early America provides a valuable natural experiment because the decentralized federalist polity allowed for a great deal of financial experimentation. Distinct regional differences appeared. In New England, small, family‐owned banks appeared and a coherent system was knit together through the operation of the Suffolk system. In the Middle‐Atlantic region, two distinct experiments were conducted: deposit insurance and free banking. The former failed, but reappeared in various guises; the latter succeeded in that it influenced America's banking policy for the next 150 years. Banking in the South and West followed a number of paths, including state‐subsidized banks designed to offer long‐term mortgage credit, free banking, and branch banking. Branch banking was the most successful of these experiments. There was no single best banking system, but systems better adapted to local conditions.