I exploit historical border discontinuities before the U.S. National Bank Act of 1863 to investigate the effects of liability insurance, extended shareholder liability, and branching on bank activity and financial stability within contiguous county pairs. I find that while double liability and branching lowered the probability of bank failure, public and mutual liability insurance generally elevated the probability of failure in both crisis and non-crisis years. Banks with double liability experienced smaller declines in deposits, note circulation, and lending during crises, while mutually insured banks experienced larger declines. I also find that liability insurance and double liability significantly affected ex ante risk-taking; insured banks substituted deposits and interbank borrowing for note issuance, increased exposure to real estate and interbank lending, and reduced cash reserves, while banks with double liability were less levered, less exposed to real estate, less reliant on deposits for funding, and maintained higher cash reserves. Finally, though I find no evidence of a trade-off between stability and credit provision, there is evidence of trade-offs between stability and industrial development.
Dr. Tyler Goodspeed is the Kleinheinz Fellow at the Hoover Institution at Stanford University. From 2020-21 he was Chairman of the Council of Economic Advisers in the Executive Office of the President, having previously served as Member, Chief Economist for Macroeconomic Policy, and Senior Economist for public finance and macroeconomics. Before joining the Council, he was a Junior Fellow in Economics at the University of Oxford, and Lecturer in Economics at King’s College London. His primary research and teaching fields are economic history and monetary economics, with secondary interests in macroeconomics and political economy. Prior to earning his Ph.D. from Harvard University in 2014, he received his A.B. from Harvard, summa cum laude, in 2008, and from 2008-2009 was a Gates Scholar at the University of Cambridge.
Goodspeed’s second book, Legislating Instability, examines the effects of unlimited liability and regulatory capture on financial stability in “free banking” Scotland. He also has a recent book, Famine and Finance, on the market for small loans during the Great Famine of Ireland, as well as companion articles in the Journal of Development Economics and World Bank Economic Review. Tyler’s current research focuses on British and North American economic history, with particular attention to informal banking and the political economy of financial regulation, as well as long-run economic development. Previously, in his first book, Rethinking the Keynesian Revolution, he analyzed the debates between John Maynard Keynes and Friedrich Hayek, considering the relevance of those debates to contemporary monetary economics. He is also an avid distance runner.