Double Liability at Early American Banks

Limited liability is a defining feature of the modern corporation, but it was not always so. By the early 1850s about one-half of all states imposed double liability on bank shareholders. This paper shows that double liability was adopted as deposits increased relative to banknotes and in conjunction with free banking; that double liability was associated with more concentrated bank shareholdings, but had little effect on share liquidity; that it increased the price of bank debt; and, that a regulatory change toward greater shareholder liability increased bank leverage ratios. In forcing bank shareholders to have more “skin in the game,” double liability changed bank investor, creditor and managerial behaviors.