Banking in the United States - Colonization to the Civil War
When the United States was still a colony, the financial system here was a complete mess. Unregulated, both the colonies and private institutions could issue paper money at will. Since there was absolutely no regulation, there was a likely chance that the institution would fail making your money worthless. Caught in the Revolutionary War without a way to finance it, the Continental Congress began printing its own currency. However, they saturated the market causing inflation; when too much money follows too few goods, making the money worth 1/100th of its face value.
To cure inflation, the First Central Bank of the United States was started in 1791 and was fully backed by the United States government. Any bank notes printed by the First Central Bank were redeemable in coin, which has tangible value. The bank was politically controversial and its charter (or authorization) was not renewed in 1811. Without a central bank, the states returned to authorizing their own bank notes and over-saturated the market again. With inflation running rampant, the Second Bank of the United States was started in 1816 to help finance the war of 1812. It faced the same political pressures as the First Central Bank and its charter wasn’t renewed when Andrew Jackson was elected president in 1832.
Through the civil war, the financial institutions in the united states were in a chaotic state. These banks were chartered and supervised by the states and were not heavily regulated. This created an opportunity for any institution that wanted to to print its own currency. At the peak, the United States had over 10,000+ variations of paper money making counterfeiting simple and hard to trace. As the Banks started to fail and consumer confidence dropped, the government needed a central system that worked.
Posted on September 25th, 2007 | By: bootstrap economist | Filed under Banking
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