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State Banking in Early AmericaA New Economic History$
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Howard Bodenhorn

Print publication date: 2002

Print ISBN-13: 9780195147766

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0195147766.001.0001

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Banking Theory and Banking Practice in Antebellum America

Banking Theory and Banking Practice in Antebellum America

Chapter:
(p.44) 3 Banking Theory and Banking Practice in Antebellum America
Source:
State Banking in Early America
Author(s):

Howard Bodenhorn

Publisher:
Oxford University Press
DOI:10.1093/0195147766.003.0003

Modern theories of financial intermediation begin from the premise that small, young firms, due to information asymmetries, will not have access to arm's length markets in bonds and commercial paper. Small and young firms must rely on financial intermediaries, principally banks, with whom these firms form long‐run relationships. Modern theory stands in contrast to the dominant contemporary theory of banking practice; namely, the real‐bills doctrine. Banks that followed the doctrine loaned only to established businesses with impeccable reputations. Had early American bankers adhered to the doctrine, they would not have been the engines of growth that they actually became. Banks mattered because they encouraged entrepreneurship by being entrepreneurial themselves.

Keywords:   asymmetric information, banks, bonds, commercial paper, entrepreneurship, financial intermediation, firms, long‐run relationships, real‐bills doctrine, reputation

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