Banking and Finance from the Revolution to the Civil War

Abstract

In creating a new nation, the United States also had to create a financial system from scratch. During the period from the Revolution to the Civil War, the country experimented with numerous options. Although the Constitution deliberately banned the issuance of paper money by either Congress or the states, states indirectly reclaimed this power by incorporating state-chartered banks with the ability to print banknotes. These provided Americans with a medium of exchange to facilitate trade and an expansionary money supply to meet the economic needs of a growing nation. The federal government likewise entered into the world of money and finance with the incorporation of the First and Second Banks of the United States. Not only did critics challenge the constitutionality of these banks, but contemporaries likewise debated whether any banking institutions promoted the economic welfare of the nation or if they instead introduced unnecessary instability into the economy. These debates became particularly heated during moments of crisis. Periods of war, including the Revolutionary War, the War of 1812, and the Civil War, highlighted the necessity of a robust financial system to support the military effort, while periods of economic panic such as the Panic of 1819, the Panics of 1837 and 1839, and the Panic of 1857 drew attention to the weaknesses inherent in this decentralized, largely unregulated system. Whereas Andrew Jackson succeeded in destroying the Second Bank of the United States during the Bank War, state-chartered commercial banks, savings banks, and investment banks still multiplied rapidly throughout the period. Numerous states introduced regulations intended to control the worst excesses of these banks, but the most comprehensive legislation occurred with the federal government’s Civil War-era Banking Acts, which created the first uniform currency for the nation.