The Complete History of Banks in the United States

When the United States became an independent nation, it did not have a central bank. This was a legacy of the colonial era. During this time, each colony followed its own practices relating to money. The differences among the colonies were the result of British regulations and a shortage in the money supply. The British never allowed the colonists to make currency, but they also failed to provide the colonists with enough coins. Many colonists turned to bartering and using items like tobacco as currency, while others used French, Spanish, and Portuguese coins that had found their way into North America from the West Indies. Paper "bills of credit" were also popular in some areas, but the use of these led to price increases. By the time the American colonies won freedom from Britain, the absence of a common currency and a central banking system were a larger problem than ever. America's early leaders realized that unless they found a way to bring all of the states together under a single financial system, the nation could fail as a whole. The United States needed a single line of currency to finance its war debts, and creating a central bank to supervise and issue that currency was an excellent way to make sure that those debts were paid. Having a central bank would also help the new nation remain united against other countries in the event of another war. In addition, having a standard American currency and a central bank could help improve trade, which was suffering greatly in the wake of the American Revolution. The history of banks in the United States is a rather long one. The country experimented with several different banking systems until the twentieth century, when it created the Federal Reserve system that remains in place today.

Early Banks (1791-1836)

In 1790, Treasury Secretary Alexander Hamilton began planning for the creation of the first US bank. He wanted this to be a centralized institution that was similar to the Bank of England. Although the main intention behind this bank was to help the federal government with its finances, Hamilton also hoped that it would promote business growth. When the First Bank of the United States opened in Philadelphia in 1791, it offered commercial loans so that new businessmen could buy what they needed to start their enterprises. The federal government owned 20 percent of the bank, while private investors owned the rest. The bank eventually spread to eight additional cities and was successful in putting a standard American currency into place and managing the war debt. Congress refused to renew its charter in 1811, however. Despite the achievements of the bank, many politicians objected to the role that the private sector played in its operations; they believed that the government should have controlled it completely. States soon began operating their own banks and issuing their own currency again. When the War of 1812 broke out, disrupting trade and sending the federal government back into debt, America's need for a central bank returned. The government established a Second Bank of the United States in 1816. This bank was larger than the first US bank and served more of a regulatory role. The Second Bank of the United States also had its headquarters in Philadelphia, but it eventually had 29 branches. It held extra money for other banks around the country and cracked down on financial institutions that appeared to be signing over too many notes. It, too, would be short-lived. President Andrew Jackson did not like how powerful this central bank was and kept it from remaining open after its charter expired. By 1836, America's second attempt at a national bank had failed as well.

Free Banking Era (1837-1864)

After the first two central banks in the United States closed, states regained their power in the banking industry. Each state had the ability to issue charters for new banks as it saw fit. Since it was now so much easier to open a financial institution, a large number of banks were established during this period. The lack of regulation had its negative effects, however. Banks were completely vulnerable to the circumstances of the market, and those that did not receive enough business simply closed. The open lending policies of this time period also contributed partially to the financial "panic" of 1837, which led to a lengthy period of economic issues.

National Banking Era (1864-1913)

Despite its problems, the Free Banking Era probably would have continued if not for the eruption of the Civil War. During this conflict, the government once again found itself in debt and needed a way to finance its expenses. In 1863, it created a national bank that followed some of the principles of "free" banking. At first, individual banks could receive charters at either the national or the state level. Banks that chose national charters were required to use government-issued bills and back them with United States bonds. The state charter option eventually phased out, leaving the country with a long-standing uniform currency for the first time. The National Banking Era played an extremely important part in the history of banks in the United States. Since that time, every bank in the country has used the same types of coins and paper bills.

Federal Reserve (1913-Today)

Over time, people in America and Europe became more open to the idea of letting central banks have a say in what private banks could or could not do. They believed that central banks were trustworthy because they made financial decisions for governments. In 1913, the United States created a new central bank called the Federal Reserve. The President decides who the chairman of this institution will be, but otherwise it takes action independently. Today, the Federal Reserve keeps the value of American currency from becoming too high or too low by using its money supply to buy or sell bonds. It also supervises banks in the United States, sends them currency, and adjusts interest rates to keep prices from rising. The Federal Reserve is based in Washington, D.C., but it has other branches across the country.