History of American money and banking system
(first period)
The first period in the history American money and banking systems lasted from the 1780s to 1860. It was a time of experimentation and debate in American banking. During this period, money and banking were part of a large battle between Federalists and advocates of states’ rights.
Federalists, such as Alexander Hamilton, believed that a strong, centralized banking system was necessary if the United States expected to develop its industries and commerce. As Secretary of the Treasury, Hamilton proposed that a national bank have the power to handle the government’s funds, charter and monitor other banks throughout the country, and issue currency.
Advocates of states’ rights, such as Thomas Jefferson, opposed the national bank because they feared that the concentration of economic power at the national level would weaken the economic and political power of individual states. Jefferson supported a decentralized banking system in which the states, rather than the federal government, would charter and regulate the banks within their borders.
In this battle Hamilton’s views prevailed. In 1791 Congress established the First Bank of the United States as a private business. Its Charter, or legal permission to operate, outlined the bank’s responsibilities, which included the issuing of representative money in the form of banknotes. These banknotes were backed by gold and silver specie.
A year later, Congress established a national coinage system, and the federal government began to mint gold and silver coins. It also established the dollar as the official unit of currency.
The First Bank of the United States brought some order to monetary and banking systems in the United States.
(1485)
History of American money and banking system
(second period).
The American monetary and banking systems have gone through several periods of development. The second period lasted from 1860 to 1913.
The situation in the country and problems connected with the Civil War convinced national leaders that the United States needed a better banking system. Congress took steps to establish a new national banking system.
By the end of the Civil War in 1865, $450 million in currency was in circulation but this fiat money was backed only by the federal government’s promise to repay at some future date. After the Civil War, Congress took actions to support the national currency as a stable medium of exchange. First, Congress tied the paper money to gold with the passage of the Coinage Act of 1873. The Gold Standard Act of 1900 committed the government to the gold standard — a monetary system in which paper money is fully backed by and convertible into gold.
The next step which Congress took was to create a dual banking system composed of national banks and state banks. The system brought more uniformity and stability to money and banking. The National Banking Acts of 1863 and 1864 required banks to hold gold and silver reserves. National banks were chartered by the federal government. As for the state banks they were chartered and regulated by individual states.
A further decision by the federal government was to issue a national currency only through the national banks. A national currency provided a nationally acceptable medium of exchange and stabilized the entire economic system.
So, a national system of banking introduced in the second period increased public confidence in paper currency and in the banking system as a whole. But of course, the system had some disadvantages. First, it did not provide for an efficient way to regulate the amount of money circulating in the economy. Second, the system lacked any central organization.
(1632)
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