Banking and credit

The banking and credit systems of British North America were very different from the financial institutions of today and were even less developed by 17th-century English standards as well. Commercial banks did not exist in Britain’s North American colonies, nor were the colonists disposed to create centralized political or financial establishments. However, a system emerged that adequately satisfied the needs of the growing and developing economy of the colonies. Personal financial networks and government policies initiated by colonial legislatures to solve the colonies’ shortage of currency and investment capital were the main institutions of banking and credit in early America.

Mercantile credit was the foundation of this system in the colonies. English and Scottish merchant houses would extend credit to their intermediaries or colonial merchants in eastern seaports on the promise of future goods. These “merchant bankers” would then distribute credit to their connections in the countryside. The system functioned along an avenue of credit and debt that ran from the rural farmer to urban mercantile firms to London or Glasgow. This credit was usually short-term and was to be remitted with the next harvest. Outside the mercantile sector access to credit was extremely limited. Merchants or wealthy landowners loaned money locally for the purchase of land or other enterprises. These individuals or firms provided many of the financial services of modern banks.

This system of mercantile credit was generally more beneficial to wealthy individuals than poorer ones. Although certainly an important part of the system, poorer members of society were not extended as much credit as were the wealthy. The latter were viewed as better risks because they usually possessed greater assets in land or slaves. This belief also generated a regional disparity in access to British credit. The cultivation of tobacco, rice, and indigo in the South for the English market made that region a more attractive investment. In this period the South received nearly 80 percent of the British credit lent to the American colonies.

The extension of personal credit played an important role in the formation of colonial society because it helped community leaders garner political support. By manipulating the creditor/debtor relationship, the early gentry created a patriarchal social order based on hierarchies of dependence in which political power (based on personal loyalty and social rank) rested with those who possessed access to foreign markets and credit.

Colonial governments were important actors in the banking and credit systems of early America. Through loan offices (or “land banks”) colonial legislatures provided loans to white male heads of households with land as collateral. Borrowers usually received currency worth up to half the value of the property being mortgaged and were free to spend the money in any manner they wished. The legislatures placed limits on how much currency one person could receive from the loan office in order to guarantee wide access and to prevent the depreciation of the currency already emitted. The repayment schedule extended over long periods, usually up to 12 years. Interest rates on the loans varied from colony to colony, but they were generally low, ranging from 5 to 6 percent in the Middle Colonies to 12.5 percent in South Carolina. The majority of colonies charged interest either at or slightly below 8 percent, the legally established limit for private transactions. In general, the land banks were successful. They dispensed funds broadly, raised revenues for the colonies through interest, enjoyed widespread support because they provided legal tender to country farmers who lacked gold or silver, and enabled large landowners to turn land into liquid capital.

Further reading: Edwin J. Perkins, American Public Finance and Financial Services, 1700-1815 (Columbus: Ohio State University Press, 1994).

—Peter S. Genovese, Jr.