Transcript The Antebellum Financial System

The Antebellum Financial
System
November 13, 2007
Origins of US Money and Banking:
Why do we have bank?
• Supply credit
• Keep assets safe
Origins of US Money and Banking:
Forms of Money
• Specie – precious metals such as gold
and silver
• Paper money – banknotes supplied by
banks
Origins of US Money and Banking:
Origins of paper money
• Example: Suppose you are a shopkeeper
and you want to stock a six month supply
of pots and pans in your store.
• You give a $500 promissory note to a local
banker
• The banker charges you a 3% interest rate
for 6 months (6% per annum) and gives
you $485 in banknotes
Origins of US Money and Banking:
Origins of paper money
• You travel to the city to buy $485 worth of
pots and pans from the wholesaler
• You return to your retail shop and sell the
pots and pans over the next 6 months
• After the 6 months you pay $500 to the
banker
Origins of US Money and Banking:
Origins of paper money
• The wholesaler pays himself, his workers,
and his suppliers with the banknotes.
• The banknotes circulate in the economy
as money
• At some point the banknotes return to the
original banker for redemption
Origins of US Money and Banking:
Origins of paper money
• Why did the shopkeeper use banknotes
instead of specie to buy his pots?
• Why did the wholesaler accept the
banknotes?
Origins of US Money and Banking:
Skepticism of Early Banks
• Do you think the bank backed up his
banknotes one-for-one with specie in his
bank?
• Bankers only held enough specie to cover
the expected redemption of banknotes
• This fractional reserve system allows
bankers to generate more profits through
extending credit
Origins of US Money and Banking:
Skepticism of Early Banks
• The perception was that bankers were
greedy and were increasing the money
supply and causing rapid inflation by
printing too many bank notes
• This is not credible because most bankers
self-regulated. Their business depended
on their ability to convert!
Origins of US Money and Banking:
Price Levels in the Antebellum Period
• Four periods of inflation
• 1790s – very few banks; probably due to
high demand of American exports
• War of 1812 – still very few banks; war
financing
• 1830s – large imports of silver from
Mexico, i.e. increase in the monetary base
• 1850s – large increases in the specie
stock, this time from California
The First and Second Banks of the
United States
• First attempts at Central Banking
• First Bank of the United States: 1791 –
1811
• Second Bank of the United States: 1816 1836
The First and Second Banks of the
United States
• Functions:
• Receive payments to the government
• Kept monetary base in check
The First and Second Banks of the
United States: Why did they fail?
• Perceived as anti-business – no cheap
credit
• Possibly unconstitutional
• “privileged monopoly”
• Banks were distrusted in general
Institutional Innovation in Absence of
Central Bank
• Suffolk Bank of Boston served as regional
bank in New England
• Controlled New England money supply
• Required smaller out-of-town banks to
keep deposits in order to keep their
banknotes convertible in Boston
• New England never needed to suspend
convertibility
Institutional Innovation in Absence of
Central Bank
• New York – deposit insurance scheme
• New York Free Banking Act of 1838
Institutional Origins of Savings
Banks
• Two purposes of banks: provide credit and
provide safe place to store assets
• Prior to banks, where did people keep
their money?
• Before the Industrial Revolution, was there
a pressing need for banks to deposit cash
wages?
Institutional Origins of Savings
Banks
• “Philanthropic” banks for the poor and
working class
• First bank chartered in Boston in 1816
• Trustees volunteered their time to run
bank and make investment decisions
• Poor and working class depositors earned
dividends on deposits
Savings Banks: Why start a
savings bank? Who benefits?
• Savers benefit
• Savings banks provided a relatively safe
place to deposit wages
• Savers earned substantial dividends from
investments
Savings Banks: Why start a
savings bank? Who benefits?
• Do the bank trustees benefit?
• Philanthropic motive?
• Philanthropy is a poor economic reason to run a
bank
• Personal gain?
• Trustees could not profit directly from
investments, but…
• Trustees could direct investments into projects
that benefit them directly or indirectly
Savings Banks: Why start a
savings bank? Who benefits?
• Example: New York savings banks
• New York government restricted savings
bank investments to state bonds
• Bonds were used to finance large
infrastructure projects, i.e. Erie Canal
• Result: savings banks located along Erie
Canal
New York Savings Banks,
1819 - 1834
- One Savings Bank
4
- Multiple Savings Banks
Rochester Area
Albany Area
New York City
4
New York Savings Banks,
1819 - 1834
- One Savings Bank
4
- Multiple Savings Banks
- Erie Canal
Rochester Area
Albany Area
New York City
4
Savings Banks: Legacy
• Opened up formal financial intermediation
to the working class
• Freed up new sources of financial capital
for investments
• Provided investment funds for important
public infrastructure projects