Section 2 The History of American Banking

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Objectives

After studying this section you will be able to:

1. Describe the shifts between centralized and decentralized banking before the Civil War.
2. Explain how the banking system was stabilized in the later 1800s.
3. Describe developments in banking during the twentieth century.

Section Focus

The history of banking in the United States is the story of shifts between a centralized, national banking system and independent state and local banks. Out of these shifts has developed the stable banking system in which we place our confidence today.

Key Terms

• bank
• national bank
• bank run
• greenback
• gold standard
• Federal Reserve System
• central bank
• member bank
• Federal Reserve note
• Great Depression
• Federal Deposit Insurance Corporation (FDIC)

Chances are there is at least one bank—an institution for receiving, keeping, and lending money—near your home. That's because banks have become a fact of everyday life in the United States. This was not always the case, however. American banking as we know it today has developed over the course of the nation's history to meet the needs of a growing and changing population.

What were the views of Alexander Hamilton (top) and Thomas Jefferson (bottom) on the creation of a national bank?

American Banking Before the Civil War

During the first part of our nation's history, banks were very informal businesses that merchants managed in addition to their regular trade. For example, a merchant who sold cloth, grain, or other goods might allow customers to deposit money. He would then charge a small fee to keep the money safe. He would also charge a fee if a customer wanted to take out a loan. These informal banks were not completely safe, however. If a merchant went out of business or was untrustworthy, customers could lose all of their savings.

Two Views of Banking

After the American Revolution, the leaders of the new nation agreed that one of their main goals must be to establish a safe, stable banking system. Such a system was important for increasing trade with other countries and ensuring the economic growth of the new United States. The nation's leaders did not, however, agree on how that goal should be accomplished. Their debate on banking during the 1780s and 1790s was part of a larger political debate about the role of government in the young country.

As you may remember from your study of American history, the Federalists believed that the country needed a strong central government to establish economic and social order. The Antifederalists favored leaving most powers in the hands of the states. These two groups viewed the country's banking needs quite differently.

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