Banking and Finance

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From the time when the Mayflower landed at Plymouth Rock (1620) until the creation of the Federal Reserve System (1913), Americans exhibited a suspicion of banking and banking regulation. Before 1776 the colonies were agrarian and fiscally conservative. Almost all wealth was fixed in land, buildings, animals, crops, and slaves, as depicted in James Fenimore Cooper's Leatherstocking Tales, especially The Pioneers (1823). A few entrepreneurial colonists turned to England for credit, but most borrowed what they needed from family, friends, neighbors, local merchants, or business partners. They repaid these loans when crops were harvested or goods sold. In 1776 no bank existed in the colonies, so the United States sought armament loans from France and other enemies of England and the colonial army asked local merchants for supplies (food and clothing). In exchange for scarce goods, the local merchants received Continental notes (the earliest form of paper money in the United States), but these notes were little more than IOUs from a group of revolutionaries, IOUs that depreciated as soon as the merchants accepted them. After the Revolutionary War the United States chartered a central bank in 1791 and 1816, but the bank's charters expired, and free banking existed between 1837 and 1862, a period during which the United States experienced devastating bank failures (1837 and 1857). In the novel Pudd'nhead Wilson (1894), Mark Twain (1835–1910) returns to the America of his youth and briefly depicts the consequences of bank failures on poor Americans, such as Roxana, a former slave who loses her life savings, her entire retirement, when a New Orleans bank fails.


The National Banking Acts of 1863 and 1864 allowed the federal government to charter banks, but these acts did not create a central bank, a single currency, or a means for regulating the money supply. The United States enacted these new banking regulations to fund the Civil War, not to regulate economic excesses, so despite the passing of these acts the nation experienced financial panics that grew both in length and severity: in 1873 the panic lasted fifty-nine days, in 1893 seventy-seven days, and in 1907 ninety-five days; the economic contractions that followed each panic lasted years. These insidious financial cycles occurred annually, but in the panic years credit became so scarce that banks were forced to suspend transactions, which resulted in bank failures. During the national banking period the United States continued to exhibit a suspicion of both bankers and banking regulation, which allowed a few ruthless financiers to profit even as the country suffered. In 1873 Charles Dudley Warner (1829–1900) and Mark Twain satirized the financial exploits of railroad speculators in their novel The Gilded Age, which gave a name to the entire period. Unlike a "golden age," the "gilded age" only appeared rich and prosperous—under the gilding existed financial speculation, corruption, and greed that ruined people's lives. In their novel Twain and Warner burlesque irrational railroad dealings that permit investors to sell railroad stock to purchase land, then borrow money against the land, then raise bond money from the towns along the new road, then sell portions of the land, and then, just before this financial pyramid collapses, borrow millions more from banks. In The American Claimant (1892), a sequel to The Gilded Age, Twain again dramatizes American financial excesses by following the exploits and speculations of Colonel Sellers.

On 1 October 1873, the same year Twain published The Gilded Age, Jay Cooke & Company of Philadelphia, one of the most prestigious banking firms in the United States, failed, triggering a suspension of banking that culminated in a depression. Although the 1873 panic, like most other panics, occurred in the fall, during a time when western banks required funds to cover grain purchases, railroad speculation, as depicted by Twain, contributed greatly to this economic collapse. Between 1860 and 1873 the miles of railroad track had doubled, so investors purchased railroad stocks at irrational prices, assuming that railroads would continue geometric expansion. But railroads had expanded too quickly, and when revenues from the roads failed to cover debt service, developers borrowed from banks and brokerage houses. These short-term loans worsened the railroads' circumstances, causing loan defaults. Jay Cooke's firm had foolishly invested $15 million in the Northern Pacific Railroad. But even as Cooke failed and the U.S. economy collapsed, a few financiers profited. In Theodore Dreiser's (1871–1945) novel The Financier (1912), the main character, Frank Algernon Cowperwood, who is a fictional representation of the financier Charles T. Yerkes (1837–1905), benefits from Cooke's failure: Cowperwood earns a fortune by selling stocks short, selling stocks that he did not own, then purchasing them at a lower price.

U.S. BANKING: 1860–1921

1860: More than 1,500 banks exist in the United States

1860–1878: Suspension of gold redemptions by the federal government

1863–1912: National Banking Era

1873: U.S. Coinage Act passes, undermining silver as a standard of evaluation

1873: Third major banking panic of the nineteenth century

1873: Mark Twain and Charles Dudley Warner publish The Gilded Age

1874: National Greenback Party formed to promote a liberal monetary policy

1875: U.S. Resumption Act passes, setting 1879 as the year to resume gold redemptions

1878: The Bland-Allison Act requires the U.S. Treasury to buy silver

1890: The Sherman Act requires the treasury to buy additional silver each month

1893: Fourth major banking crisis of the nineteenth century

1893: President Grover Cleveland repeals the silver purchase acts

1896: William Jennings Bryan runs for president on a free-silver platform but fails

1900: The Currency Act sets a rigid gold standard

1901: Frank Norris publishes The Octopus

1907: First major banking crisis of the twentieth century

1908: Upton Sinclair publishes The Moneychangers

1912: Theodore Dreiser publishes The Financier

1913: Federal Reserve System begins, creating a central banking system that still exists

1921: Almost 30,000 banks exist in the United States

Dreiser's novel beautifully illustrates the financial excesses of the national banking period; in fact The Financier accurately chronicles most nineteenth-century banking practices and controversies. Cowperwood is born in Philadelphia the year after the Second Bank of the United States closed and free banking began. Cowperwood's father, as a banker in Philadelphia (the center of early American banking), knew Nicholas Biddle (1786–1844), the president of the Second Bank of the United States. In The Financier, Dreiser describes briefly the battle between President Andrew Jackson and Nicholas Biddle, characterizing it as one of the great controversies of the day, and later in the novel Dreiser dramatizes the national banking period, a time when laissez-faire banking practices precipitated economic chaos. Cowperwood, like Yerkes, loses a fortune in a relatively small panic caused by the Chicago fire (1871) due to excessive speculation, using his funds, his customer's funds, and Philadelphia tax revenues that were being held in a "sinking fund." These "sinking funds" were created by cities to manage bonds that would finance projects such as roads, utilities, or buildings. To assure investors that the bonds would be repaid, the city formed a "sinking fund" into which they placed taxes earmarked for the payment of interest and the repurchase of bonds. But the city treasurer selected a private financier, such as Yerkes (Cowperwood), to both sell the bonds and manage the sinking fund. Since the city did not expect to earn interest on the sinking fund, the private financier could invest the city's money and keep the profits—a practice that led to speculative investments in streetcar lines and railroads, placing the city's revenues at risk, and that lost or earned fortunes for a few well-connected financiers such as Cowperwood, who loses his and the city's money in the 1871 panic but who recovers his fortune in 1873 when others are losing everything.

The 1873 panic was both a banking and railroad crisis, but the panic of 1893 was more purely a banking crisis. As in the past, eastern banks distrusted western and southern banks and reluctantly loaned them money, so in August 1893, when the money supply tightened, New York banks severely cut currency transfers to rural banks, just as the western banks needed extra funds for harvests. Frank Norris (1870–1902) explores the connections between agriculture and high finance in The Octopus (1901) and The Pit (1903), the two volumes of his uncompleted Epic of Wheat trilogy. In the first volume, Norris investigates the production of wheat by California farmers whose lands and lives are controlled by the Pacific and Southwestern railroads. The "octopus" of the title is the railroad system that controls grain prices, shipping costs, interest rates, state legislation, and even local newspapers. The second volume, published posthumously, follows the wheat to the Chicago Board of Trade where futures are exchanged. In The Pit the main character is a wealthy speculator who is destroyed by an overproduction of wheat. In both novels Norris dramatizes the forces that controlled farmers, and in the projected third novel, Norris planned to follow American wheat to a famine in Europe.

During the panic of 1893, at the same time western banks were seeking credit for harvests, eastern bankers were fearing the "free-silver" movement. A free-silver victory and subsequent monetary devaluation might have cost bankers a third of their wealth, so many chose not to loan money and placed assets in foreign markets, such as London. This flight of capital caused the federal treasury's gold reserve to fall below $100 million. In the United States, the history of gold as a store of wealth is complex and often misunderstood. Before 1900, the United States might be described as having had an unofficial bimetal standard (silver and gold), but gold backed most banknotes when gold was available. At times, to cover war debt, the federal government suspended gold redemptions, as occurred from 1860 to 1878. During the 1890s the free-silver movement, led by William Jennings Bryan, a populist running for president, called for an official bimetal standard, but Bryan lost his bid for the presidency. With the passage of the Currency Act (1900), the United States for the first time adopted a rigid gold standard, which regulated the money supply without regulating the economy or banks. Writing during this period, Henry Blake Fuller (1857–1929) focused his novels on the financial exploits of city dwellers, capturing fully the banking world of Chicago in The Cliff-Dwellers (1893) and On the Stairs (1918). In The Cliff-Dwellers, a bank teller embezzles money from the Underground National Bank, and in On the Stairs, Fuller details the rise of Johnny McComas at the Mid-Continent National Bank. Both novels explore how the greed of urban denizens caused financial instability in a banking system that lacked regulation.

After 1900, during the Progressive Era, the public and a few leading financiers became increasingly unhappy with the unstable, unregulated banking system, a discontent that was fueled by novelists who increasingly dramatized the world of high finance. Edwin Lefevre (1871–1943), originally educated as a mining engineer, published a collection of short stories titled Wall Street Stories (1901) and a series of novels—The Golden Flood (1905), Sampson Rock of Wall Street (1907), and The Plunderers (1916)—that accurately and critically depicted the financial markets. Other novelists from the early 1900s, such as David Graham Phillips (1867–1911), who wrote The Deluge (1905) and The Cost (1904), were labeled muckrakers, and they are known not only for novels but also for nonfiction articles that revealed the corruption of the day. Their novels often depict a hero who can either overcome or succumb to the immorality of business.

Another muckraker, Robert Herrick (1868–1938), wrote the novel The Memoirs of an American Citizen (1905), which tells the rags-to-riches story of Edward V. Harrington, who arrives in Chicago unemployed and is arrested for picking pockets. An intelligent young man, Harrington eventually succeeds in the meatpacking industry. After earning a fortune as a ruthless businessman, he turns to politics, using his business connections to become a U.S. senator. Early in life Harrington realizes that a hungry person can be arrested and jailed for stealing food, while a financier will be praised for embezzling millions. Throughout the novel the reader has sympathy for Harrington because he is pragmatic, not evil. He does what is necessary to survive and thrive, yet he will not send rotten meat to American troops as his competitors do, and his patriotic longings cause him to leave the business world and enter politics. Although Harrington "buys" his appointment to the Senate, the book ends with a sense that the government might do some good in regulating financial excesses. Other muckrakers wrote nonfiction articles that were as popular as novels. In a series of articles for Everybody's Magazine, Thomas W. Lawson (1857–1925), a Boston financier, attacked the robber barons by telling the story of Amalgamated Copper, and these articles were so popular that they were collected in a book, Frenzied Finance (1905). Lawson exposed both stock market and insurance abuses.


The financial crises of the nineteenth century and the muckrakers' exposés set the stage for banking reform, but before bankers and politicians chartered a new central bank, another devastating panic occurred in 1907, which began when several New York banks attempted and failed to corner the copper market. The New York Clearing House contained the crisis by extending credit to member banks; unfortunately customer panic spread to the trusts and brokerage houses that were not members of the New York Clearing House. J. P. Morgan, the wealthiest banker of the time, recognized that a collapse of the trusts would damage the entire economy and played a pivotal role in controlling the panic by pooling private money to support troubled companies. During this 1907 crisis the Bank of England, by raising interest rates, was able to minimize the economic damage to Great Britain. If the United States had had a central bank to distribute credit wisely, the 1907 panic and many nineteenth-century bank suspensions, panics, and failures could have been prevented. In response to the 1907 crisis, the best-known muckraker of the period, Upton Sinclair (1878–1968), published The Moneychangers (1908), a novel that attacked both the ethical and financial failures of the bankers and speculators whose actions precipitated and exacerbated the panic of 1907. And in 1912 Dreiser published The Financier, the first volume of his financial trilogy that would eventually include The Titan (1914) and The Stoic (1947). In the final volume of Dreiser's trilogy, Frank Cowperwood dies, but the novel continues after Cowperwood's death, tracing the decline of his fortune during the 1907 panic.

The success of the Bank of England during this crisis of 1907, the plans of bankers such as J. P. Morgan, and the novels of writers such as Upton Sinclair and Theodore Dreiser all convinced politicians that federal banking regulations were needed; thus in 1913 the long American distrust of banks and banking regulation ended with a new banking system. Although President Woodrow Wilson was elected in 1912 as a Democrat who feared a strong central government, he signed into existence the Federal Reserve System, recognizing the need for a central banking system that could regulate the money supply and respond to future banking crises.

See alsoMuckrakers and Yellow Journalism; Presidential Elections; Wealth


Primary Works

Dreiser, Theodore. The Financier. 1912. New York: Penguin, 1995.

Sinclair, Upton. The Moneychangers. 1908. Amherst, N.Y.: Prometheus, 2001.

Secondary Works

Chernow, Ron. The House of Morgan. New York: Grove, 1990.

Friedman, Milton, and Anna J. Schwartz. A MonetaryHistory of the United States, 1867–1960. Princeton, N.J.: Princeton University Press, 1971.

Hammond, Bray. Banks and Politics in America from theRevolution to the Civil War. Princeton, N.J.: Princeton University Press, 1957.

Michaels, Walter Benn. The Gold Standard and the Logic ofNaturalism: American Literature at the Turn of the Century. Berkeley: University of California Press, 1987.

Myers, Gustavus. History of the Great American Fortunes. 3 vols. Chicago: C. H. Kerr, 1910.

Oberholtzer, E. P. Jay Cooke, Financier of the Civil War. 2 vols. Philadelphia: G. W. Jacobs, 1907.

Rothbard, Murray. A History of Money and Banking in theUnited States: The Colonial Era to World War II. Auburn, Ala.: Ludwig Von Mises Institute, 2002.

Wicker, Elmus. Banking Panics of the Gilded Age. Cambridge, U.K., and New York: Cambridge University Press, 2000.

Roark Mulligan