Central Banking in the United States - The Origins

More history

The Bank of North America and the First Bank of the United States

Mention of Robert Morris, a man of dubious motives, who wanted to organize and lead a central bank based on the British model. He sought, and received, a monopoly license to issue paper money. People did not put trust in the currency, and the bank failed.

Within five years, there was another attempt, which came to an end when, during the War of 1812, far too much money had been issued, inflation went rampant, and the currency failed.

The Second Bank of the United States

In 1816, a new central bank was established, likewise with the intention of creating a uniform national paper currency (monopoly on issuing notes) and relieving the national debt. One addition: the federal government would accept payment only in this currency. State banks were free to exist, and could issue their own notes, but had to maintain their reserves in federal currency (rather than the currency of other banks) to back those notes. It was thought that this would prevent the money multiplier for compounding.

However, banks continued to loan, debasing their own notes against federal notes, refusing to redeem their notes for federal notes, thus increasing the amount of currency they could put into the market. In a way, it was like debasing paper money, and it led to rampant inflation, and ultimately the collapse of the state banking system.