The rise of institutional mortgage lending in early nineteenth-century New Haven.

• Author: Kochevar, Steven J.

NOTE CONTENTS INTRODUCTION I. MODES OF CAPITAL ALLOCATION AND MORTGAGE LENDING IN ANTEBELLUM NEW HAVEN A. Elite Versus Democratic B. Institutional Versus Non-Institutional Lending in New Haven's Mortgage Market C. Institutional Lending in New Haven: 1800-1844 II. MORTGAGE LENDING IN NEW HAVEN BEFORE 1837 A. Bank Lending Before 1837 1. The New Haven Bank 2. Other Bank Lenders B. State Lending Before 1837 III. MORTGAGE LENDING IN NEW HAVEN DURING AND AFTER 1837 A. Mortgage Lending in New Haven in 1837: The Town Deposit Fund B. Mortgage Lending After 1837: The Rise of the New Haven Savings Bank IV. WHY DID THE SHIFT IN NEW HAVEN'S MORTGAGE MARKET OCCUR? A. Economic Theories 1. Macroeconomic Theories 2. Microeconomic Theories B. Possible Legal Changes in Incorporation and Contracting C. The Town and the Bank: A Sociopolitical Story CONCLUSION APPENDIX I APPENDIX II INTRODUCTION

Financial institutions promote economic development. Empirical economic research has established that the presence of financial intermediaries leads to wealth creation. (1) While theorists have long disputed whether financial institutions are a cause or effect of economic growth, (2) the balance of the argument has tipped in favor of those recognizing a causal role for banks and other financial intermediaries. (3) The last few centuries have borne out the wisdom of Alexander Hamilton: "[m]ost commercial nations have found it necessary to institute banks; and they have proved to be the happiest engines that ever were invented for advancing trade." (4)

Where these happy engines come from is much more of a mystery. A lively scholarly debate continues over which factors contribute, or are essential, to the creation of sound financial institutions. (5) This debate is not merely academic: much of humanity lives without financial institutions or substantial economic development. If the current debate produces coherent accounts of how and why financial institutions form, then these insights could inform legal and policy choices in the many jurisdictions seeking to promote economic development. (6)

This Note seeks to contribute to this debate with an original case study. It examines the development of institutional mortgage lending in New Haven, Connecticut in the early nineteenth century. It focuses on this period and this market because, around 1837, new lending institutions appeared in New Haven and began to make a significant volume of mortgage loans to middle-class New Haven citizens. (7) Prior to 1837, the city's lending institutions primarily made mortgage loans to an elite segment of the city's population. The speed of this shift, as well as New Haven's documentation of mortgage lending in its Land Records office, make the city an attractive case study. Moreover, land and improvements to land constituted a huge portion of the nation's wealth in this early period, and mortgage lending was an important part of the financial system. (8) The importance of accessible mortgage markets continues to the present day. Modern development theorists have hailed the economic and social virtues of empowering holders of real assets to borrow against them. (9)

In focusing on the development of a more broadly accessible mortgage market in antebellum New Haven, this Note addresses two particular conversations within the wider debate over the origins of financial institutions. First, the economic history of the United States in the early nineteenth century has served as an important case study for how and why financial institutions emerge. (10) The country's enviably rapid expansion during this period is surely the primary reason for this sustained historical attention. But the early nineteenth-century United States is also attractive because it was so diverse. Different regions walked different paths to economic development but shared some initial conditions, allowing scholars to compare the effects of regional policy choices while controlling for other factors like cultural and legal heritage. (11) This Note makes a novel contribution to the literature on New England's development. (12) In particular, it offers New Haven's mortgage experience after 1837 as an exception to the pattern of "insider lending," which prevailed throughout New England at the time. (13) This Note also adds some nuance to the division of the early United States into separate regions. In New Haven's case, money from the sale of western lands by the federal government had a direct impact on the city's mortgage market. Even at this early stage in America's economic history, federalism and national policy choices had important, even transformative, consequences for the nation's development.

The second conversation addressed by this Note concerns the role of legal and political institutions in the development of financial institutions. In the wider debate over the drivers of financial development, commentators have found it useful to delineate between theories that emphasize the legal origins of financial institutions and those that cast financial development as the result of politics and political institutions. (14) While this Note considers possible legal origins for the 1837 shift, it ultimately sides with the political-institutions camp. In particular, it offers an account of how the Town Deposit Fund, a local body created with the direct political participation of New Haven's citizens, contributed to the shift in the city's mortgage market. Many political-institution accounts focus on the incentives and actions of governments at a higher level--considering, for instance, the incentives of state governments to regulate financial institutions. (15) This study adds greater depth to the political institutions perspective by providing a local example of how political institutions shape financial development. Given that New England, in particular, had a large number of small banks during the early nineteenth century, (16) this more local perspective is valuable.

Part I of this Note introduces some terminology to describe the changes in New Haven's mortgage market. It distinguishes capital allocation that relies on pre-existing social networks, dubbed "Elite" lending, from capital allocation that does not depend on pre-existing social networks, termed "Democratic" lending. Part I also presents two datasets documenting mortgage lending in New Haven between 1800 and 1844 and discusses the entry of new institutional lenders into the market around 1837. The next two Parts of the Note explore this change and its context more fully. Part II examines mortgage lending in New Haven before 1837, describing how banks primarily conducted Elite lending though pre-existing social networks. Part II concludes by discussing mortgage lending by the State of Connecticut before 1837. Part III looks at mortgage lending during and after 1837. It first examines loans made by New Haven itself in 1837. Next, it discusses the rise of the New Haven Savings Bank in the late 1830s and early 1840s. Throughout, it documents key differences between the Elite mortgages made before 1837 and the later mortgages made by the Town and the Savings Bank. Ultimately, Part III casts these post-1837 loans as Democratic and more accessible to a broader range of lenders in the community, indicating a transition in New Haven's financial development.

Part IV proposes possible theories to explain this transition, introducing economic, legal, and sociopolitical accounts. It supports a political-institutions account, suggesting that government action in markets, particularly at the local level, can encourage further economic development by private actors. In particular, Part IV argues that political participation by a broad range of New Haven residents in the creation of the Town Deposit Fund spurred more widespread mortgage lending by private banking institutions. This model of government trailblazing of markets offers several lessons for modern development efforts. Part IV explores these lessons and points out avenues for further research.

1. MODES OF CAPITAL ALLOCATION AND MORTGAGE LENDING IN ANTEBELLUM NEW HAVEN

   This Part introduces some terminology and the empirical foundations of this Note. Part I.A defines and explains two terms used to describe different types of lending in New Haven. I refer to lending before 1837 as "Elite" and after 1837 as "Democratic." The next two sections present the empirical foundation of this Note: two datasets constructed from primary research in the New Haven Land Records. The first, less detailed dataset, shown in Part I.B, examines New Haven's total mortgage market at several points in the early nineteenth century. The second, more detailed dataset, shown in Part I.C, documents institutional mortgage lending in the city between 1800 and 1840. Both datasets confirm that New Haven's mortgage market changed significantly in the late 1830s, as institutional lenders began to lend in substantial volumes for the first time.

   1. Elite Versus Democratic

      This Note uses two theoretical terms to describe New Haven's mortgage market: "Elite" and "Democratic." (17) I use these terms as shorthand to refer to several interrelated but distinct attributes of lending within an economy. These features include the participation of a financial intermediary, the methods of identification and evaluation of borrowers and their ability to repay, the complexity of loan terms, and the means of pooling capital to make loans. Because several different loan attributes are incorporated into the terms "Elite" and "Democratic," it is best to think of loans as existing along a spectrum bounded by these terms. Particularly during periods of economic change, many loans will have both Elite and Democratic characteristics. My purpose in using these terms is not to delineate hard-edged analytical categories, but rather to concisely describe a complex shift in New Haven's mortgage market.

      I use "Elite" to describe a mode of...