Fear and greed: The evolution of double liability in American banking, 1865-1930

This paper examines the pattern and timing of the enactment of double liability for state banks in the United States prior to the Great Depression. Under double liability, shareholders of failing banks could lose, in addition to the initial purchase price of shares, an amount equal to the par value of shares owned. The results suggest that double liability was adopted by states subject to greater economic risks, where bank failures were more likely, or where the economy and banking sector were more advanced and bank failures would be more costly (i.e., fear), and that single liability was adopted by more rapidly growing states, where the payoff to greater risk-taking was higher (i.e., greed).