Fragile by Design

Author:Calomiris, Charles W., Haber, Stephen H.
Language: eng
Format: epub
Publisher: Princeton University Press
Published: 2013-09-01T16:00:00+00:00

Centralized Banking in a Centralized Federation

These characteristics of the Canadian political system had far-reaching implications for banking legislation. In the United States, bank chartering was dominated by fragmented state-level decisions until the 1980s, allowing local coalitions in favor of unit banking to shape policies. Those coalitions, as we discuss in chapter 6, quickly undermined any effort to establish large banks with multiple branches. In Canada, authority over banking was centralized from the very beginning. Because any political bargaining among coalitions had to take place at the national level, the initial system of large banks with multiple branches was never seriously threatened.

How did the centralization of political power in Canada entrench a system of branch banking? Political bargaining at the state or provincial level is more likely to result in a unit-banking law than bargaining at the national level. First, at the national level, all vested interests are aggregated, with weights that depend on various determinants of their relative political power. A policy (like unit banking) that may be a local political winner in particular locations (e.g., Illinois or Kansas, where the combination of incumbent unit bankers and “populist” supporters of unit banking might dominate) will have a much harder time winning backing at the national level, where a majority of the political weight (including national coalitions of commercial and industrial interests) favors branching. Second, bargaining at the state or provincial level effectively precludes a system of banks with national branches. A state government’s decision about branching affects that state only. Even if, say, Kansas passes a law allowing branching, that law does not allow the establishment of a nationwide branching network unless the Kansas legislature can coordinate simultaneous actions by the other state legislatures (a far-fetched idea).

In Canada, the political fights over banking were national from the beginning. The national aggregation of vested interests took into account the benefits of bank-chartering rules for nationally organized constituencies, and the outcomes of those political battles applied to the nation as a whole. Regional factions and coordination problems that plagued U.S. banking policy for two centuries were absent by construction in Canada.

The geography of Canada meant, in addition, that one of the most important constituencies—merchants—became a strong lobby in favor of a system dominated by a small number of large banks with the ability to branch as they pleased. Canada’s natural resources—its wheat lands, forests, and mineral deposits—were located in isolated regions, separated by vast areas that were for the merchants’ intents and purposes effectively uninhabited. The primary task facing Canadian merchants was not to move food from hinterlands to cities and manufactures from one city to another, as was the case in the northern United States: it was to move raw materials across Canada and then across the North Atlantic to Great Britain. Canadian merchants therefore saw it as in their interest to promote a system of nationwide banks that could transact in international bills of exchange and domestic bank bills over long distances. As one scholar put it, it was advantageous

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