political system was that states were given the freedom to establish systems reflecting local needs and preferences. Put in place to perform certain functions under one set of economic circumstances, how did it alter its behavior and service the needs of borrowers as circumstances changed. Kuznets (1958) argues that one measure of the financial sector’s value is how and to what extent it evolves with changing economic conditions. AdaptabilityĪs important as early American banks were in the process of capital accumulation, perhaps their most notable feature was their adaptability. Number of Banks and Total Loans, 1820-1860 Year This essay discusses how regional regulatory structures evolved as the banking sector grew and radiated out from northeastern cities to the hinterlands. Nominal gross domestic product increased an average annual rate of about 4.3 percent over the same interval. Growth in the financial sector, then outpaced growth in aggregate economic activity. economy increased at a remarkable annual average rate of 6.3 percent. During the era, the number of banks increased from 327 to 1,562 and total loans increased from just over $55.1 million to $691.9 million.
Table 1 reports the number of banks and the value of loans outstanding at year end between 18. Thus, at the onset of the antebellum period (defined here as the period between 18), urban residents were familiar with the intermediary function of banks and used bank-supplied currencies (deposits and banknotes) for most transactions. In 1820 there were 327 commercial banks and several mutual savings banks that promoted thrift among the poor. Although most banks specialized in mercantile lending, others served artisans and farmers. As city banks proved themselves, banking spread into smaller cities and towns and expanded their clientele.
port city had at least one commercial bank serving the local mercantile community. Financial Sector Growthīy 1800 each major U.S. Like schools, bridges, road, canals, river clearing and harbor improvements, the benefits of banks were expected to accrue to everyone even if dividends accrued only to shareholders. In the last case, contemporaries typically viewed banks as an integral part of a wider system of government-sponsored commercial infrastructure. was viewed as an important first step in forming an independent nation because banks supplied a medium of exchange (banknotes 1 and deposits) in an economy perpetually strangled by shortages of specie money and credit, because they animated industry, and because they fostered wealth creation and promoted well-being. Given that many of the colonists’ grievances against Parliament centered on economic and monetary issues, it is not surprising that one of the earliest acts of the Continental Congress was the establishment of a bank. The possibilities of commercial banking had been widely recognized by many colonists, but British law forbade the establishment of commercial, limited-liability banks in the colonies. Encouraged by Alexander Hamilton, Robert Morris persuaded the Continental Congress to charter the bank, which loaned to the cash-strapped Revolutionary government as well as private citizens, mostly Philadelphia merchants. The first legitimate commercial bank in the United States was the Bank of North America founded in 1781.