Otis White is nostalgic for the days of “strong and engaged local bankers,” men who worked their way up to become the “capi di tutti capi of civic leaders in most cities. … They ran important companies, but that wasn’t why they were powerful. Their power came from their continual involvement in civic work, an intimate knowledge of their communities and their occasional boldness.” (New York Times, June 1.)

I immediately thought: “redlining.” I don’t know for sure, but I suspect that those “civic bankers” of old helped to keep African Americans and Latinos confined to poor neighborhoods by refusing home loans. If that’s true, it should be part of the story.

Nevertheless, Otis is right that there was a positive side to the old banking industry–and all forms of commerce that are rooted in localities. As my colleague Stephen Elkin argues in a new book (Reconstructing the Commercial Republic: Constitutional Design after Madison), a free market always generates a politically powerful class. Perfect political equality is incompatible with the economic freedom that generates prosperity. However, it matters who holds disproportionate power because of their wealth. Madison counted on an agrarian elite, whose investments were tied up in land. Because they could not easily move their capital, they would have to worry about their communities and their reputations.

The same was true for banks in the 1950s-1980s. As Otis notes, “The law prohibited bank companies from owning banks outside their home states and sometimes even outside their home counties. So Citizens and Southern [National Bank] could grow only if Atlanta grew too.” Thus you could count on bankers for civic leadership, especially in dire situations like natural disasters. But today, “the top three banks in Chicago, Dallas, Denver, Houston, Los Angeles, Washington and scores of other cities are owned by companies headquartered elsewhere. (In New Orleans, only one of the top three is owned locally.)”

Even the redlining example illustrates how incentives have changed. Discriminating against minority borrowers was completely immoral and indefensible. It was also economically irrational, but it supported a community norm (racial discrimination). Today’s international corporations, with their mobile investments, cannot advance any value–moral or immoral–other than maximum returns for their shareholders. When a Hurricane devastates New Orleans, the banks’ best response is to take their capital away, not to help rebuild the city.