This post is part of Notice & Comment’s symposium on Peter Conti-Brown and Sean Vanatta’s Private Finance, Public Power: A History of Bank Supervision in America. For other posts in the series, click here.

Peter Conti-Brown and Sean Vanatta’s Private Finance, Public Power: A History of Bank Supervision in America is ambitious in its temporal sweep, extending from the 1790s to the 1970s.  It is likewise ambitious in the number of lines of scholarship in which it intervenes.  In this post, I will discuss the book’s intervention in one of those lines: the revisionist movement to correct, in the authors’ words, “the still-stubborn myth that American state capacity only came online during the Progressive Era” (p. 14).  To be sure, much of the book is devoted to the Federal Reserve System, founded in 1913 legislation that is a Progressive Era keystone.  Yet bank supervision’s pre-1913 history gets a full one-third of the book’s narrative, and most of that pre-1913 history focuses on the period between the late 1700s and the stereotypical origin date of the federal administrative state in the 1880s, when Congress started today’s civil service (in 1883) and the first independent regulatory commission (in 1887).  This period is what the leading revisionist Jerry Mashaw called the “lost 100 years of American administrative law.”  What can administrative historians of that lost century gain from incorporating bank supervision into their understanding?

The material for Conti-Brown and Vanatta’s contribution in this vein consists mainly of their work on the federal supervision of national banks that began in 1863.  In contrast to the gigantic First and Second Banks of the United States that loomed over the period 1791-1836, or the subsequent era dominated by countless state-chartered banks that ran up to the Civil War, Congress in 1863 provided for mass grants of national bank charters and imposed a tax on state bank notes (raised to prohibitive levels in 1865), with the result that in the course of the 1860s four-fifths of antebellum state banks disappeared or converted themselves to national banks (pp. 50, 88).  To supervise the new class of national banks that would rapidly rise to preeminence, Congress in 1863 created a new Office of the Comptroller of the Currency (OCC).  This bureau decided which applicants would receive national bank charters, conducted on-site examinations of national banks (looking at their private books and questioning their personnel), and could force such banks into receivership.  In the authors’ telling, the OCC from the mid-1860s through early 1870s successfully asserted discretionary authority to promote the soundness of national banks, though in the early 1870s the bureau retreated, adopting an approach that was more ministerial and deferential to bankers, which did not change until the 20th century (pp. 48-49, 67, 89). 

The temporary yet meaningful assertion of discretionary authority in circa 1863-1871 is a fascinating addition to the historiography on the lost century of federal government capacity.  While the OCC’s organic act said it should grant charters mechanically to all applicants meeting certain objective criteria, the bureau “had no intention of handing out charters as indiscriminately as the Act described,” instead scrutinizing applicants on subjective extra-statutory bases including character, reputation, qualifications, and business prospects, not to mention “restrain[ing] charter extensions in service of monetary policy,” discouraging certain capital increases so as to control inflation (pp. 49-51, 89).  In order to supervise banks once they were chartered, the OCC stretched its statutory authority to appoint examiners on an ad-hoc per-diem basis and thereby created a corps of permanent examiners engaging in continuous oversight geared toward the overall soundness of banking practice, not just violations of rules (pp. 51-57).  As to receivership, the OCC won recognition from the judiciary of its unilateral power “over how, and then whether, to proceed to liquidate a bank,” even before congressional amendments that made the authority statutorily clear (pp. 57-59). 

From the perspective of administrative law and its history, the story of the early OCC is of interest partly because its buildup of discretion and autonomy did not originate in statutory text but in administrators’ invocation of a purposive and consequentialist approach.  As the first Comptroller, Hugh McCulloch, wrote in his 1864 report with regard to chartering, “I may seem to have exercised a power not warranted by the act,” “but if not sustained by its letter, I have been by its spirit, and am willing to let the future decide as to the correctness or incorrectness of my course” (quoted on p. 51).  His successor Hiland Hulburd, in justifying charges against banks to sustain the full-time examiner corps, admitted in 1867 that the “amount is not assessed according to a technical construction of the law,” but “is intended to pay such salary as will enable the Department to employ a competent man to make these examinations” (quoted on p. 62).  When the OCC’s political cachet subsequently declined, its critics raised the question of how the bureau had ever gotten so far in stretching its statutory authority—“No such office as bank examiner was ever created,” insisted the New York Financier in 1872 (p. 66). 

That the OCC’s power expanded so greatly, at least for a time, seems attributable to the ways in which the office cultivated the substance of competence—plus a reputation for competence—in ways that harnessed old and new sources of administrative authority in this transitional era.  In the early republic and through part of the 19th century, practical federal authority was typically personal and local in the sense that it depended on the preexisting social position of an officer within a local community and local political network, leveraging preexisting social reputation and social trust to get things done.  By the 20th century, however, federal authority depended more on an agency’s impersonal capacity to use a specialized body of knowledge in an instrumentally rational manner—to deliver the mail faster and more accurately, to judge which drugs were unsafe, etc. 

The OCC of the 1860s seems, in Conti-Brown and Vanatta’s vivid telling, to be some of both.  In some ways it looked forward to instrumentally-rational expert bureaucracy.  While banking scarcely existed in 18th-century America, by the mid-19th century it had become a specialized occupation; McCulloch, Hulburd, and their successors were all bankers by trade.  Further, the relative stability of the OCC’s examiner-and-clerk corps allowed for the accumulation of experience and some degree of promotion from within.  And yet the nature of banking in the 1860s was still sufficiently local and dependent on individual bankers’ character, reputation, and network connections that much of the OCC officials’ specialized knowledge bears an interesting similarity to the type of social knowledge and micro-political authority that we associate with pre-bureaucratic society.  The OCC “recruited examiners with significant political connections, meaningful banking experience, or, ideally, both,” who “provided [the Comptroller] with legitimacy, prestige, and specific knowledge of local banking markets that would enable him to exclude speculators and weak state banks” from obtaining charters (pp. 51-52).  In post-charter examination, “[e]xaminers inquired … about the status and security of loans, a process that required knowledge of current market conditions, securities prices, and the reputation of local businessmen.  Here, as in chartering, the Comptroller’s decision to employ examiners with local knowledge and public reputation secured and—perhaps more importantly, projected—competence” (p. 54).  Contrast this rendition of bureaucratic success with the authors’ later discussion of Theodore Roosevelt’s reformist Comptroller starting in 1908, whose innovation was to diminish local examiner autonomy and pool knowledge across examiners (pp. 115-118).   

Of course, the OCC during the period circa 1872-1907 took a more deferential approach to the bankers.  But Conti-Brown and Vanatta do another service to lost-century historiography by going into depth on exactly how private-sector dominance operated during this period—and especially by showing how far banking departed from a laissez-faire atomism and how much it resembled a regulatory governance structure.  The New York Clearinghouse Association (NYCA) was formed by banks in that city during the 1850s to manage interbank transfers, and similar associations were set up in other cities over the next generation (pp. 65, 91-92).  Organizations like NYCA allowed member banks to collectively protect themselves against the spread of runs across banks and thereby meet some of the political demand for financial stability.  The potential superiority of private clearinghouses was strikingly demonstrated in 1871: an OCC examiner accepted a favorable loan from Ocean National Bank in exchange for ignoring the bank’s unsound condition, while the NYCA—which routinely extended credit to its members and therefore developed the capacity to supervise them—conducted an examination that discovered Ocean’s true rotten state, not to mention the OCC official’s corrupt transaction (pp. 64-65).  NYCA also developed a practice of pooling resources to mitigate or prevent panics—an approach that proved successful in 1873, 1884, and 1890 (pp. 70-71, 81-83, 97).  Indeed OCC hitched its wagon to the Clearinghouse, appointing its examiner for New York City according to the Clearinghouse’s nomination from 1872 into the 1900s (p. 66).  This regime of predominantly private regulatory governance proved workable and stable for some time, though it contained the seeds of its own destruction, as the very integration of banks through institutions like clearinghouses made it easier for runs and panics to spread (p. 92-93), and NYCA performed poorly in the panics of 1893 and 1907 (pp. 98-102).  Only after those failures did the political system reach a new settlement with a different public-private balance.  Yet the authors’ account shows what a gross over-simplification it would be to sum up the period 1872-1907 as one of laissez-faire or of a “weak state.”  Their analysis exemplifies the value of carefully comparing public and private institutional alternatives and of integrating administrative history with business history. 

Nicholas R. Parrillo is Townsend Professor of Law at Yale.