Having written for American Banker for 45 years now, I visited the New-York Historical Society’s new exhibit on Alexander Hamilton with special excitement.
What’s the relationship? This newspaper was founded because Hamilton’s plans kept being abandoned. Alexander Hamilton was responsible for the establishment of America’s first government-owned national bank, the Bank of the United States. When it was functioning, starting in 1791, we had a responsible system of banks that did not issue more bank notes than their capital allowed them to back.
The BUS kept the other banks honest. It sent reps to their offices to present notes that the banks had issued and the BUS had accepted for redemption in gold and silver. Issue too much paper and your days as a bank were numbered.
But Thomas Jefferson and others who wanted the nation to remain rural thought a central bank would lead to an urban society. In 1811 the charter of the first BUS was allowed to lapse, and the banking system became chaotic — until 1816, when the second BUS was chartered.
That too was allowed to collapse, through Andrew Jackson’s 1836 veto of its renewal. The second BUS also returned bank-issued notes for gold and silver, so it limited the amount of paper money that banks could create. It was hated, therefore, by the bankers who ran these banks and by the people who had borrowed money and were thrilled if inflation made repayment cheaper in real goods and services.
(Jackson, the first President who was not from Virginia or Massachusetts, represented people from the developing West, who were more likely to be borrowers than savers.) The demise of the second BUS led to financial chaos. After that the value of each bank note, our basic money, depended on the integrity and soundness of each individual issuing bank.
Again we had many banks creating unlimited amounts of currency of dubious value. This was exemplified by so-called “Wildcat Banks,” whose operations were out where the wildcats lived. The notes they issued could be spent far from home without fear of their being sent home and slapped on the counter for gold. They were distributed too far from the major centers for large banks to gather them up and bring them home with a demand for specie, as representatives of the BUS had done.
Enter American Banker. This paper, which started life as Thompson’s Bank Note Reporter, would determine what each bank’s currency was worth by comparing the bank’s specie capital with the dollar amount of its notes outstanding, and publish this on a regular basis.
A storekeeper could subscribe to the Reporter and then decide what percentage of face value any bank’s notes offered by customers was worth. And until the Civil War, this type of publication was the only way tradespeople had to determine what money was good and what was not.
During the Civil War the northern government tried to force banks to be responsible by requiring all nationally chartered banks to have a certain percentage of government bonds behind their bank notes outstanding. It further tried to make all state-chartered banks switch to national charters, by imposing an annual 10% tax on their outstanding notes.
This should have made all banks national banks and limited the inflationary creation of currency. But sharp state bankers got around this. They switched from issuing bank notes as a means of providing money to their borrowers to creating bank deposits, which were not subject to the tax. These deposits naturally became more important than bank notes as a means of payment throughout the nation.
So with Hamilton’s ideas scrapped and the National Banking Act subverted, we continued with a haphazard monetary system that led to frequent panics until the major Panic of 1907. Because of this one the Federal Reserve System was established, in 1913.
(Obviously it did not eliminate business cycles; consider the Great Depression.) Hamilton’s idea of a national bank is now only for history books and exhibits such as the one I just saw. But American Banker keeps rolling along, and with more to write about than the value of bank notes.
