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Posts Tagged ‘History of Banking’

History of BankingThe pace of progress is quickening as we begin this, our second in the series of our history of banking as if it occurred in one week.  But, it isn’t until 7:26 on Wednesday morning that the story of American banking starts to unfold. The actual date is 1741 and the problem is tight British control over the number of coins entering the Colonies. Americans are tired of relying on crop notes and barter, and decide to start banks of their own. The predictable response is a legal roadblock. The British prohibit banking and the experience sours many American Colonists on financial institutions.

This Wednesday of our banking week closes with a very significant American event, the end of the Revolutionary War. It is 14 minutes after midnight on Thursday before Alexander Hamilton establishes a federally chartered Bank of the United States over Thomas Jefferson’s strong objections. Yet the charter of the bank runs just 20 years and by Thursday evening it is dead.

In fact, when the U.S. Government needs to borrow $11 million to buy Louisiana – in our time sequence this 1803 event takes place at 9:29 on Thursday morning – no U.S. bank has enough clout to finance the deal. Fortunately, a British institution steps up to the plate. For America, Thursday turns into a very long night filled with the nightmare of the Civil War.  Yet as Friday dawns, the United States enters a promising new day. The country is unified and state banks are flourishing. Though state banks in the South had weakened or disappeared, a rebirth has begun.

It is mid-day on Friday – 11:31 a.m. – when the National Bank Act of 1863 passes. The leaders on this Friday are men of integrity like Israel Lash, who launches the First National Bank of Salem (N.C.) to serve thrift-conscious Moravians, after it becomes clear that The Bank of Cape Fear’s Salem branch (Lash’s former employer) will not be part of the revival. Late this Friday morning, Alfred Austell founds one of the oldest banks in Georgia in his home. Though the Reconstruction Act absolved Austell from any obligation to redeem his former bank’s Confederate money, Austell depleted his personal fortune to exchange this money for gold, an act of faith his former customers clearly remember. As the National Bank Act strengthens federal control over banking and currency, Austell, Lash and fellow bankers are encouraged to make new beginnings.

Over the lunch hour that Friday, it appears American banking has finally gained a stability that has been very elusive during its first two days of life. At long last the nation has a uniform currency, gained primarily by taxing state-chartered bank’s notes, rendering them of insignificant value.

On Friday – the fifth day in our banking week – the nation is charged with great creative energy. Before Friday ends, Thomas Edison produces the first commercially viable electrical lamp and George Eastman markets his first box camera. Yet as Friday – and the first five days of modern banking history – draw to a close, surprisingly little has changed in the way banks operate. The Monday morning customers of Amsterdam Wisselbank would feel comfortable in the Friday evening banks of the United States.

However, there are blips on the radar screen that predict a storm of activity. For example, when transatlantic cable is laid in the 1870s – 3:43 p.m. Friday in our time line – some bankers realize they can take advantage of small price differences in New York and London markets to profit on arbitrage. This begins a much more creative time and one that evidences strategic innovations that will ignite a tremendous leap forward in the pace of change, yet one that also will elevate that risks and develop new challenges for the industry.

We will discuss those changes over the next few weeks.

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