U.S. Central Bank History ECO 473 – Money & Banking – Dr. D. Foster

The Origins of U.S. Central Banking 1791–1836 The Bank of North America (1781). The First Bank of the United States (1791). The Second Bank of the United States (1816). 1837–1913 The “free-banking” era. The Civil War & greenbacks – a fiat money. The National Banking system.

The Bank of North America Robert Morris; war profits; 1781 charter; 1782 start Chartered by the Continental Congress Thomas Willing as president Sole printer of paper currency (replaced continentals) Bank notes used for state & federal taxes. 1783 – converted to state bank (Penn.) Robert Morris, founder of the Bank of North America. Only bank with federal charter. Mercantilist movement behind banks. Fed owns 20%, deposits funds here. BUS buys government debt; issues notes. 1791-1796 wholesale prices up 72%. 1811 – renewal fails in Congress. Thomas Willing, first President of the Bank of North America; later President of the First BUS.

The 2nd Bank of the United States War of 1812. BUS will hold state bank notes. 2nd BUS inflates, then deflates in 1819. Once again, specie suspension and bank panics. “The bank was saved, but the people ruined.” Jackson kills the 2nd BUS in 1832. Both the constitutionality and the expediency of the law creating this bank are well questioned by a large portion of our fellow citizens, and it must be admitted by all that it has failed in the great end of establishing a uniform and sound currency.

The “Free Banking” Era: 1836-1863 Van Buren sets up Independent Treasury System Came and went and lasted only until Civil War. Federal government held only specie, not paper. Decentralized banking 1836-1862 Still heavily regulated. State banks required to hold state gov’t. debt to back their note/dd issue. Notes accepted for taxes. Restricted branching making redemption harder. Private note clearing – Suffolk System Held specie reserve of members. Different bank notes accepted. Insulated banks from panics.

The National Banking System The National Banking Act of 1863 Created nationally-chartered banks. Created a national currency. Taxed non-national bank notes. Bought gov’t debt & issued notes. The rise & fall of Jay Cooke. State banks still benefit by holding reserves in national notes. Didn’t stop periodic panics.

Evolution to Central Banking: 1865–1912 The National Banking Act (1863) The Gold Standard (1875). Brief foray into bi-metalism. Panics of 1873, 1893 and 1907 Federal Reserve Act of 1913

U.S. Central Bank History ECO 473 – Money & Banking – Dr. D. Foster