The year was 1791. Times were turbulent, the future uncertain, the economy in massive debt, and the newly-born country, the United States of America, in widespread disagreements. It was, in many ways, not too dissimilar from our current political climate.
It is hard to imagine that the current financial system of the US, the Federal Reserve—which has acted as the catalyst for global economic booms and deficits as well as the backbone of capitalist wealth upon which all other world markets rely—was largely conceived by a young man in his early thirties who believed in the idea of the “American Dream.”
Alexander Hamilton created a central bank—the First National Bank—that exceeded its initial goals of erasing war debt and providing a national currency and loans to rejuvenate the economy. While the bank itself did not survive past its original charter of 1811, Hamilton’s ideals lived on.
What made Hamilton a financial genius was his foresight that saw well beyond Jefferson’s single-minded vision of the United States as a primarily agrarian and rural society. It almost seems that Hamilton could have predicted the US becoming a global economic superpower by the 20th century. Favor for Hamilton’s policies resurfaced in the wake of the War of 1812, and thus the Second National Bank was born in 1816. The reinstatement of a federally chartered bank did not last long and, moreover, could not survive the surge of Democratic ideals presented by the Jacksonian era.
The “Free Banking Era” that followed from 1837 to 1862 brought about a financial system consisting solely of state-chartered banks. However, in regressing a larger and more mature United States back to a system that lacked standardization of monies between state lines, such banks ultimately surrendered to the National Banking Act of 1864. Again, the US found itself in the same predicament that had fostered the creation of the Second National Bank: war debt, this time from the Civil War.
The National Banking Act formed the national currency we use to this day: the United States Dollar. The Act also re-established national banks under a unique dual system wherein both the federal and state governments chartered banks—an unprecedented idea for any country at the time.
After the US adopted the gold standard for coinage in 1873, the banking system maintained a status quo; major banks such as J.P. Morgan were founded and swiftly found themselves heading an oligopoly over the investment banking industry until the early 1920s. When in 1907 the US fell victim to a financial crisis, dubbed the Knickerbocker Crisis, forward action materialized on the 16th Amendment, which passed in 1913 as the Federal Reserve Act after overwhelming support from a frantic public.
Our young nation’s third and current central bank, the Federal Reserve System, holds authority over all banks in the US. It was created with trifold goals: maximize employment, stabilize prices, and moderate long-term interest rates.
Though there certainly are aspects of our modern economy that would stun even the naïve genius in Hamilton, his early contributions to the American financial system have lived on in ways he likely envisioned in between revolutionary battles and constitutional prattles. While some may say that our country has a long way to go, he’d surely agree that we have come quite a long way since.
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Sincerely,
Devin McQuillan
Associate, Creative Solutions
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