Question

Provide a short history of financial institutions and their contributions to society, with brief examples.

Answer 1

The First Banks: 1791 to 1832

In most states of the early federal union, bank organizers needed special permission from the state government to open and operate. For a while, an additional layer of oversight was provided by the Bank of the United States, a central bank founded in 1791 at the initiative of the nation's first Secretary of the Treasury, Alexander Hamilton. Its Congressional charter expired in 1811. A second Bank of the United States was created in 1816 and operated until 1832.

In those days, city bankers tended to be extremely cautious about to whom they lent and for how long. To make sure they had enough cash available to meet unexpected demands from depositors, bankers generally made short-term loans only. Thirty to sixty days was the norm. Typically manufacturers and shopkeepers would use these funds to pay their suppliers and workers until they could sell the goods to customers. After that sale they would pay off the bank loan.

1832 to 1864

When the second Bank of the United States went out of business in 1832, state governments took over the job of supervising banks. This supervision often proved inadequate. In those days banks made loans by issuing their own currency. These bank notes were supposed to be convertible, on demand, to cash—hat is, to gold or silver. It was the job of the bank examiner to visit the bank and certify that it had enough cash on hand to redeem its outstanding currency. Because this was not always done, many bank note holders found themselves stuck with worthless paper. It was sometimes difficult or impossible to detect which notes were sound and which were not, because of their staggering variety.

By 1860 more than 10,000 different bank notes circulated throughout the country. Commerce suffered as a result. Counterfeiting was epidemic. Hundreds of banks failed. Throughout the country there was an insistent demand for a uniform national currency acceptable anywhere without risk.

1865 to 1914

The new system worked well. National banks bought U.S. government securities, deposited them with the Comptroller, and received national bank notes in return. By being lent to borrowers, the notes gradually entered circulation. On the rare occasion that a national bank failed, the government sold the securities held on deposit and reimbursed the note holders. No owner of a national bank note ever lost his or her money.

National bank notes were produced and distributed through an involved process. Once the basic engraving and printing were done (at first by private printers, later by the U.S. Bureau of Engraving and Printing), the notes were entered on the books of the Office of the Comptroller of the Currency, then returned to the printer where the seal of the Treasury Department was stamped on each.