Evolution of American Banks in the United States

Banks have two vital responsibilities in any economy. First and foremost, they are behind a payment system that is essential for any modern economy (Sylla). The majority of payments are made through checks, credit cards issued by financial institutions or linked to them, and bill payments made through web-based banking services. In truth, bank money accounts for the vast majority of the country's money stock. The remainder is in the form of legal tenders issued by the government. These tenders in the United States include Federal Reserve notes and coins. The second role of the banking system is that it acts as a financial intermediate which invest or lend money that people deposit in them or credit that the institutions create for businesses, governments, and households (Sylla). This represents that business side of the banking system with most of these intuitions being profit-seeking enterprises comprising of shareholders who provide the capital necessary to start and maintain the business. The profit-making institutions receive their revenue from charging interests rates on their loans.

With this in mind, the transfer and payments systems in the United States held similar importance in its early days. However, as late as 1781, there were no banking institutions in the country (Sylla). The colonial Americans used to give credit to each other or depended on loans from merchants and financial institutions in Britain. The currency circulating in the then economy consisted of foreign coins and paper money which was issued by the colonial governments (Sylla). The term bank in colonial America was used to mean a heap or a pile. The need for money increased during the American Revolution. The continental Congress saw the need for money to finance the revolution and as such established the country's first paper money. They were referred to as continentals and where primarily created to be redeemable on demand for specie. However, the Continental Congress went against its promise by issuing large amounts of the currency which led to inflation which was further propagated by the war. In the process, the citizenship lost the confidence with the paper money, and the country was left with a substantial debt after the war ("A History of Central Banking in The United States | Federal Reserve Bank Of Minneapolis.").

As a result of the enormous debt resulting from the war and the fact that state governments were prohibited from making their currencies under the constitution, the first bank in America was established. The Bank of the United States was created in 1790 with the aim of handling the national debt and ensure that the government had a sound financial background ("A History of Central Banking in The United States | Federal Reserve Bank Of Minneapolis."). Alexander Hamilton who at the tie was serving as the Treasury secretary was the brains behind the formation of the bank which he designed to resemble the Bank of England. The second Bank of the United States was created after the war of 1812 when the national debt was on the rise again. Confidently, the state-chartered banks suspended specie payments which shaped public opinion to the need of a national bank (Cowen). The then Congress established a new one with the aim of promoting the use of a uniform currency through encouraging financial institutions to resume specie payments.

However, this was not achieved until 1863 and 1864. This was the time when The National Banking Acts of 1863 and 1864 were passed into law. As their names suggest, the Acts were legislated to provide a uniform currency for the entire country (Grossman). Before the enactment of these acts, the currencies circulating in the then economy were confusing. There were notes from sound financial institutions, those from struggling banks, those from institutions that failed and also fraudulent currencies. In most occasions the bank notes traded on discounts with currencies from small unknown banks having less value as compared to those from the large, well-known institution and as such having less value in commercial transactions. The second element of the National Banking Acts was the introduction of federally issued bank charters.

From the early days if the republic the banking sector was considered the purview of state governments (Grossman). This meant that people wanting to be issued with banking charters had to approach the state government which had the responsibility of asserting that the individual was of proper moral standards. The problem with this systems was that the system was marred with bribery and political interference and also efforts by existing bakers to block new entries which represented additional competition (Grossman). The third essential element of the National Banking Acts was to offer financial assistance to the Union during the civil war. The Acts were adopted during a time of war, and the banks were required to deposit United States bonds to the Controller which maintained the demand for the Union's Securities and at the same time fund the ongoing war (Grossman).

Having solved the issues with currency confusion, the national banking system significantly grew at the significant expense of the state-chartered financial institutions which were experiencing a downturn given the fact that they could no longer issue notes. The growth and development of the new system lead to the extinction of the old regime, and deposit-taking grew, and less rigid capital requirements increased. However, this success did not last long. The National banking period was hit with several financial crises including the ones that occurred in 1873, 1884. 1890. 1893, and 1907 ("A History of Central Banking in the United States | Federal Reserve Bank of Minneapolis."). Many of the observers blamed the new national banking system for these crises. Many of these incidents were president by bank panic where depositors withdrew their money in large numbers causing solvent institutions to fail.

After the 1907 financial crisis, it became apparent to both the Congress and bankers that it was vital to reconsider a centralized system of banking. This led to the adoption of the Andrich-Vreeland Act of 1908. The piece of legislation provided the necessary monetary support to pull the country out of the crisis. The law also laid the foundations for the establishment of the National Monetary Commission which was tasked with coming up with a viable long-term solution to the nation's financial problems. By 1912, Woodrow Wilson replaced the Aldrich approach by the introduction of the Federal Reserve Act in 1913 (Grossman). The law established the Federal Reserve System which was to be used as the central bank in the United States. However, unlike other nations where there is only one central bank, the Federal Reserve Act had provision for up to twelve reserve institutions. Based on the fact that the citizenship was afraid of a centralized monetary authority, the Congress passed the 1935 Banking Act which centralized the powers of the Federal Reserve to a Board of Governors located in Washington and thus reduced individual reserve institutions to a consultative role (Grossman).

In the present day, the system is mostly known for its monetary policy rather than the fundamental responsibilities that prompted its creation. Although the Federal Reserve, same as its predecessor systems, has faced considerable amounts of stormy relationships with Congress and the Executive, it managed to significantly revolutionaries the banking sector in the country and has become a model for many other nations around the world. This, however, does not mean that the systems have not failed. In 2007-2008, the banking system in America underwent yet another financial crisis which led to market funding for banks drying up. It took massive interventions from the federal and the United States to prevent catastrophic happenings as experienced in previous financial crises.

Works cited

"A History of Central Banking in The United States | Federal Reserve Bank Of Minneapolis." Minneapolisfed.Org, 2017, https://www.minneapolisfed.org/community/student-resources/central-bank-history/history-of-central-banking.

Cowen, David. "The First Bank Of The United States." Eh.Net, https://eh.net/encyclopedia/the-first-bank-of-the-united-states/.

Grossman, Richard S. "US Banking History, Civil War to World War II." Eh.Net, https://eh.net/encyclopedia/us-banking-history-civil-war-to-world-war-ii/.

Sylla, Richard. "The US Banking System: Origin, Development, and Regulation | The Gilder Lehrman Institute Of American History." Gilderlehrman.Org, 2017, https://www.gilderlehrman.org/history-by-era/hamiltoneconomics/essays/us-banking-system-origin-development-and-regulation.

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