Topic5Lesson1 - 32 Setting the Stage I The Historical...

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32 Setting the Stage One importmt characteristic of the banking system that developed was that it did not engage in long-term lending to industry. It frequently provided short-term loans and on occasion rolled these over. Some banks lent to industry during the first part of the nineteenth century, but these usually did not survive the periodic liquidity crises. Instead industry relied on internal finance and markets for raising funds. For small firms, the informal market of family and friends was particularly sigruficant; for large firms, stock exchanges were. The Bank of England came to play an increasingly important role in guaranteeing the stability of the banking system during the nineteenth century. The last true panic was the Overend, Gurney and Company crisis of 1866. After that time, it was clear that the Bank of England would step in and provide the necessary liquidity in times of crisis, and systemic runs were subsequently avoided. Although the events of World War I resulted in New York's replac- ing London as the major financial center, the United Kingdom has re- mained a stock market-oriented financial system. It is also the location of the offices of a very large number of foreign banks that participate in the various Euro markets. Domestically, the banking system remains highly concentrated, with nationwide branching networks, and does not lend long term to industry. The United States The United States has rather a different banking history than most other industrialized countries do. As Roe (1994) and others have doc- umented, the reasons are largely due to a different political history. Alexander Hamilton was influenced by British experience with the Bank of England and after the Revolution advocated a large federally chartered bank with branches all over the country. This led to the foun- dation of the First Bank of the United States (1791-1811) and later the Second Bank of the United States (1816-1836). There was considerable distrust of the concentration of power these institutions represented. In a report on the Second Bank, John Quincy Adam wrote, "Power for good, is power for evil, even in the hands of Om~~i~otence."~ The con- troversy came to a head in the debate on the rechartering of the Second Bank in 1832. Although Congress passed the bill, President Jackson ve- ,toed it, and the veto was not overturned. Since then, there has been a strong bias toward decentralization of the banking system and an aversion to powerful institutions of any kind. I The Historical Development of Financial Systems 33 Throughout the nineteenth century the U.S. banking system was highly fragmented. Unlike every other industrializing country, the United States failed to develop nationwide banks with extensive branch networks. Prior to the Civil War, states were free to regulate their own banking systems, and there was no national system. Many states
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This note was uploaded on 07/25/2008 for the course ECON 330 taught by Professor Minetti during the Spring '08 term at Michigan State University.

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Topic5Lesson1 - 32 Setting the Stage I The Historical...

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