History of Banking Revisited
At the end of the American Revolution, the United States was saddled with significant war debt. In order to handle the debt and to create a unified currency, Alexander Hamilton proposed the creation of a central bank for the young nation. The First Bank of the United States, headquartered in Philadelphia, was modeled after the Bank of England. It served as the nation's central bank from its charter in 1791 until 1811 when the charter was allowed to expire.
The United States has a long history of central banking, but Sweden wins the prize for the oldest central bank. The Sveriges Riksbank has been in operation since 1668. Sweden's central bank is important also because it sponsors the Nobel Prize in economics.
In the nineteenth century, America went through a series of economic panics that led to the creation of another central bank. This bank eventually became a political target and failed to bring economic stability to the country.
The Second Bank of the United States was given a twenty-year charter in 1816 to help the United States economy recover from the economic effects of the War of 1812. The Second Bank established a uniform currency and acted as a depository for the Treasury's accounts. The Second Bank of the United States was believed by many to be corrupt, and political pressure from President Andrew Jackson sealed its fate. In 1833, three years before its charter expired, Jackson had his Treasury secretary withdraw the United States government's deposits from the bank and placed in state-chartered banks. This effectively killed the bank, and by 1841 the Second Bank of the United States was bankrupt.
During and after the Civil War, the United States created more national banks and reintroduced a single uniform currency. These national banks were instrumental in allowing the government to borrow by issuing bonds. Unlike the First and Second Banks of the United States, however, these national banks were decentralized.
The Bank Panic of 1907 was the impetus for creating the Federal Reserve System. A failed attempt by a Montana investor to corner the copper market led to a loss of confidence in the financial institutions associated with him and his brother. The contagion spread to unassociated institutions, and within a few days an all-out run on the New York financial system was under way. Fortunately, J. P. Morgan and Theodore Roosevelt's Treasury secretary brought calm to the situation by injecting cash into the banking system and eventually bringing an end to the bank runs. The panic of 1907 showed that America needed a central bank to act as a lender of last resort to ensure liquidity in the banking system.
