Why have they for so long been an integral part of our economy? Why, as in the financial crisis that commenced in , do banks every so often get into trouble and create serious problems for the country? Banks have two important economic functions.
First, they operate a payments system, and a modern economy cannot function well without an efficient payments system. We make most of our payments by writing checks, swiping credit cards issued by banks or tied to them, and by paying bills via online banking. We have confidence in bank money because we can exchange it at the bank or an ATM for legal tender.
Banks are obligated to hold reserves of legal tender to make these exchanges when we request them. The second key function of banks is financial intermediation, lending or investing the money we deposit with them or credit they themselves create to business enterprises, households, and governments.
This is the business side of banking. Most banks are profit-seeking corporations with stockholders who provide the equity capital needed to start and maintain a banking business. Banks make their profits and cover their expenses by charging borrowers more for loans than they pay depositors for keeping money in the bank.
The intermediation function of banks is extremely important because it helped to finance the many generations of entrepreneurs who built the American economy as well as the ordinary businesses that keep it going from year to year. But it is inherently a risky business. Will the borrower pay back the loan with interest? And what happens if, in the pursuit of profit, banks do not maintain levels of reserves and capital consistent with their own stability?
There were no modern banks in colonial America. Colonial Americans gave credit to each other, or relied on credit from merchants and banks in Great Britain. Money consisted of foreign coins and paper money issued by the governments of each colony.
When George Washington became our first president under the Constitution in , these were the only three banks in the United States. Washington tapped Hamilton to be our first secretary of the treasury. In his first two years in office Hamilton moved quickly, and often controversially, to give the United States a modern financial system.
He implemented the federal revenue system, using its proceeds to restructure and fund the national debt into Treasury securities paying interest quarterly. He defined the US dollar in terms of gold and silver coins; these would serve as reserves backing bank money as banks proliferated. The BUS prompted state legislatures to charter more banks—there were about thirty of these by , more than by , — by the s, and — on the eve of the Civil War.
These banks were corporations, and the states also chartered many non-bank business corporations. A distinctly modern US financial system did not exist in the s but was firmly in place by the mids, after which it expanded rapidly to serve, even foster, the rapid growth of the US economy. The banking system was a key component of it. Since most banks were business enterprises chartered by state legislatures, banking became highly politicized.
A party in control of the legislature would grant bank charters to its backers and not those of the other parties. Banks also became sources of revenue: state governments invested in banks and earned dividends from them, they charged banks fees for granting charters of incorporation, and they taxed them.
Individual legislators accepted bribes to help some banks get charters and to prevent other banks from getting them. These general incorporation laws made the granting of bank charters an administrative rather than a legislative function of government. We have to grow within our risk framework. And, our growth must be sustainable, which has three elements: driving operational excellence, being a great place to work for our teammates and sharing our success with our communities.
Our focus. Business practices Part of driving responsible growth is maintaining strong guidelines for business practices and professional and personal conduct that all employees, and anyone who acts on our behalf, are expected to adopt and uphold.
See our practices. Our products and services. The Bank of the United States, now commonly referred to as the first Bank of the United States, opened for business in Philadelphia on December 12, , with a twenty-year charter. The bank was overseen by a board of twenty-five directors. The size of its capitalization made the Bank not only the largest financial institution, but the largest corporation of any type in the new nation.
Many of the initial investors were foreign, a fact that did not sit well with many Americans, even though the foreign shareholders could not vote. When the bank subscriptions went on sale in July , they sold so quickly that many would-be investors were left out, prompting fierce bidding in the secondary market for scrips. The bank also managed the U. Although the U. To avoid inflation and the appearance of impropriety, the Bank was forbidden from buying U.
In addition to its activities on behalf of the government, the Bank of the United States also operated as a commercial bank, which meant it accepted deposits from the public and made loans to private citizens and businesses.
Its banknotes paper currency most commonly entered circulation through the loan process. It extended more loans and issued more currency than any other bank in the nation because it was the largest financial institution in the United States and the only institution holding federal government deposits and possessing branches throughout the nation.
Banknotes issued by the Bank of the United States were widely accepted throughout the country. And unlike notes issued by state banks, Bank of the United States notes were the only ones accepted as payment of federal taxes. Giannini began by selling fruits and vegetables from a horse-drawn wagon. But he was made for bigger things. At the time, big banks lent only to large businesses, handled deposits of the wealthy, and frowned on aggressive advertising.
The novice financier knocked on doors and buttonholed people on the street. He persuaded "unbanked" immigrants that gold and silver coins were safer in vaults than under mattresses. Moreover, the money would earn interest at his "Bank of Italy. On the morning of April 18, , a massive earthquake hit San Francisco. The ensuing fires burned down the large banks. Their superheated metal vaults could not be opened for weeks—lest the cash and paper records catch fire when oxygen rushed in.
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