the antebellum financial system november 13, 2007
TRANSCRIPT
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
- Multiple Savings Banks4
4New York City
Rochester Area Albany Area
New York Savings Banks, 1819 - 1834
- One Savings Bank
- Multiple Savings Banks
- Erie Canal
4
4New York City
Rochester Area Albany Area
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