Early Banking History
Terms in this set (41)
Why did Congress print the nations first paper money?
To Finance the American Revolution
What is fiat currency?
Currency that's not backed by gold or silver.
What was the nation's first paper money called?
What is inflation and what caused it in early Ameircan History?
There is too much money in circulation so it loses value. Congress printed too many continentals - hence the phrase "not worth a continental."
Why, when, and where was the First Bank of the US created?
Treasury Secretary Alexander Hamilton urged Congress to create the bank in 1791 and it was headquartered in Philidelphia.
Which prominent economic thinkers did Hamilton look to in forming his own vision for the American Economy?
Jacques Necker, David Hume, and Adam Smith
Why did Hamilton want to see the American economy make better use of public debt?
Public debt had helped england grow its military might and make it a prosperous country. He thought it would bring in capital to the US.
What did Hamilton argue that a national bank could do for the country?
Issue paper money, provide a safe place for public funds, offer bank facilities for public trade, be the Government's fiscal agent.
Which existing bank system did Hamilton base his proposal off of? In what ways did Hamilton's system differ from this system?
The Bank of England. Bank of England shareholders get one vote, Hamilton's shareholders' vote count depends on investment size. Bank of England has no max ratio of loans to specie whereas Hamilton's bank would. Lastly, the government owns 20% of US bank, England's bank is privately owned.
What was Secretary of State Thomas Jefferson's view on the First Bank?
He thought it was unconstitutional, in contrast with his view of the US as chiefly agrarian, and would create a financial monopoly that would undermine state banks.
What was James Madison's view on the creation of the First Bank of the US?
Opposed the bank for similar reasons as Jefferson, but also objecting that a 20 year charter was too long for an untried entity to last in a young coutry.
Which group of Americans were primarily opposed to the banks? What was the reasoning of the opposers?
Agrarian minded americans who feared a large, powerful central bank would be detrimental to state banks. Many opposers also believed that the constitution did not give the government the right to create a bank.
What was President George Washington's view on the bill?
Unsure whether to sign or veto. recieved documents from Attourney General Edmund Randolph and Secretary of State Thomas Jefferson who opposed the bill. He sent the documents to Hamilton who countered the arguments and convinced Washington to sign the bill.
In what cities were the branches of the first Bank of the US established? Why?
Philadelphia (HQ), Boston, NY, Charleston, Baltimore, Norfolk, Savanna, Washington D.C. Finance international trade and government operations.
How did the size of the First Bank compare to the sizes of other institutions at the time?
Largest financial institution or corporation of any kind.
Describle the Initial Public Offering of the First Bank.
Largest initial public offering in the country to date (many foreign investors which the Americans didn't like). IPO doesn't offer shares for immediate delivery, rather subscriptions (scrips) that act as down payment.
What was a scrip? How much did each scrip initally cost?
A down payment on the purchase of Bank stocks. $25.
What was the total amount bank scrip holders would pay for the bank stock? how much was paid in specie and how much was paid in US debt securities?
$400 over a period of 2 years - $100 in specie and $300 in US debt securities.
What were the duties of the First Bank?
Fiscal Agent: collect tax revenues, secure government funds, make loans to the government, transfer government deposits through bank's branch network, pay government bills, and manage the Treasury's interest payments to European investors in US government securities. Also for public: make loans and accept deposits.
What caused the financial crisis of 1791?
Prices for US securities and bank scrips fell by up to $100 which threatened to completely collapse prices across the economy.
What was William Duer's and Alexander Macomb's plan? What was the effect of their plan?
Their plan was to corner the market on US gov. securities by selling appreciated assets to other investors at a significant profit. When the First Bank slowed down the expansion of its loan pool banknote numbers went down resulting in a credit crunch. Face financial ruin. Financial contagion because he borrowed so much money.
What did Alexander Hamilton and other membesr of the sinking fund commission do to defuse the panic of 1792?
Hamilton asked commission to authorize sale of government securities in the market place.
How did the banknotes of the First Bank most commonly enter circulation?
Through the loan process.
Why did state chartered banks envy the First Bank?
First Bank recieved all of the Government deposits so it could make more loans.
How did the first bank conduct a rudimentary form aof monetary policy?
By managing lending policy and flow of funds through accounts.
When did the bank's charter wear out? Did Congress choose to renew it?
1811 (it was a 20 year charter). No, by one vote.
Why did the First Bank close?
Some people thought it was unconstitutional. Federalists lost power after Hamilton's death.
What result did the removal of the First Bank have on the economy? Why?
Economy suffered since states made too many loans and issued too much money which caused an increase in spending and raised prices.
When was the Second Bank of the US chartered?
What effect did the Second Bank have on the American economy?
Controlled the money supply which boosted the economy.
Who vowed to kill the Second Bank?
Andrew Jackson, elected 1828 as president.
Who was Henry Clay?
Jackson's opponent in the presidential election. Loses to Jackson in no small part because Jackson did not support the bank and this decision was popular.
Who was NIcholas Biddle?
Nicholas Biddle was an American financier who served as the president of the Second Bank of the United States.
When did the Second Bank's charter expire? Was it renewed?
1836. No since his attack on banker controlled power touched a popular nerve with americans.
What kind of banks took hold during 1816-1836?
State chartered banks and unchartered free banks that issued their own notes, redeemable in specie.
What did banks do to boost commerce in 1836-1865?
offered demand deposits.
What are demand deposits?
money you can get at at any time.
what was the purpose of the clearing house? why was it created?
to provide a way for hte city's banks to exchange checks and settle accounts. in response to a rising volume of check transactions. (all states w/ different currencies.)
When was the National Banking Act passed? What was this act?
1863, during the civil war. created national banks which issued circulating notes that had to be backed by US gov. securities.
What ammendment to the act was made?
required taxation on state bank notes but not on national bank notes to create a uniform currncy for the nation.
despite the taxes, why did state banks remain popular?
popularity of demand deposits.