Stocks and Bonds by Todd A. Knoop

Author:Todd A. Knoop
Language: eng
Format: epub, pdf
Publisher: ABC-CLIO
Published: 2020-03-12T16:00:00+00:00

A BRIEF HISTORY OF CENTRAL BANKING IN THE UNITED STATES AND ACROSS THE WORLD

Central banks started out in the 1600s as banks for the government (or the monarchy) but morphed into providing broader services to the entire financial system over time. Initially, central banks were needed because governments fought wars, and finance was just as important as military strategy when it came to getting resources to the right places at the right times in order to win battles. The first central banks took in deposits, held gold reserves, made loans, and issued banknotes. Central banks were often seen as more trustworthy guardians of a country’s money supply than monarchs were, because central banks kept sufficient reserves of gold or silver to back the paper currency they issued—central banks were usually richer than the monarchs. As a result, central banks were seen as less likely to fall into the trap of printing up too much currency and creating higher inflation. Central banks were also seen as more trustworthy, because it is harder for a bank to default on its debts than a ruler who was often considered above the law. As a result, countries that were able to establish powerful central banks were also able to exert control over their money supply, keep inflation low, and maintain financial and economic stability. The most successful central bank was the Bank of England, which helped create a financial empire that was just as important as the British shipping empire was and allowed the British to maintain control of over one-fourth of the world’s land and population by the late 1800s.

However, central banking was slow to catch on in most places—by 1900, only eighteen countries had a central bank. This was in large part because of a lack of overall financial development in most countries, which made central banking unnecessary. In the United States, the absence of a central bank reflected a deep-seated skepticism about banking, and contradictory feelings about finance that are still held by many Americans to this day. There were proponents of central banking, including Alexander Hamilton, who declared, “Banks were the happiest engines that ever were invented” for creating growth.1 On the other hand, many other American founding fathers were fearful of banks, particularly central banks. Their skepticism was influenced by what they saw as the exploitive behavior of financial institutions in England, particularly the Bank of England. Thomas Jefferson, among many others, viewed the Bank of England as a tool of large industrial interests that worked against the needs of the common people, particularly small farmers. John Adams claimed that banks and central banks damage the “morality, tranquility, and even wealth” of countries.2

In 1791, a private bank was chartered by the federal government to also serve as the first American central bank: the Bank of the United States. It was also the only bank that could operate across state lines, quickly making it the country’s largest financial institution. However, it’s charter was revoked in 1811 under suspicion that it

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