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How Commercial Bankers Discovered Consumer Credit: The Federal Housing Administration and Personal Loan Departments, 1934–1938

Louis Hyman

in Debtor Nation: The History of America in Red Ink

This chapter focuses on personal loan departments. On May 4, 1928, National City Bank opened the nation's first personal loan department. Curiously, despite the popularity of the department and ... More

This chapter focuses on personal loan departments. On May 4, 1928, National City Bank opened the nation's first personal loan department. Curiously, despite the popularity of the department and despite the prominence of National City Bank—one of the country's largest commercial banks—few other banks opened their own personal loan departments in the late 1920s. Nonetheless, by the end of the 1930s, personal loans were a standard part of commercial banks' offerings. The chapter then asks why banks would begin to loan to consumers in the middle of the 1930s when jobs were so precarious, rather than in the 1920s when prosperity reigned. In answering this question, one can see how powerful federal policy can be in transforming the most basic practices of capitalism, since it was through a previously overlooked federal program—the FHA's Title I loan program—that bankers learned consumer lending could be a good idea.Less

Francs, Banks, and Gold: Britain and the Swiss Financial Market

NEVILLE WYLIE

in Britain, Switzerland, and the Second World War

This chapter examines British and U.S. efforts to put a stop to Swiss purchases of German gold and limit the financial and technical support given to its enemies by the Swiss banking sector. In both ... More

This chapter examines British and U.S. efforts to put a stop to Swiss purchases of German gold and limit the financial and technical support given to its enemies by the Swiss banking sector. In both these areas, British officials grossly misjudged the scale and intensity of Swiss financial collaboration. The chapter explains how thinking on the Swiss case influenced broader debates on the issue of ‘loot’ and ‘gold’, and gave rise to a series of currency control measures designed to protect British interests from malevolent activities of Swiss banks. It sheds light on Britain's own dependency on Swiss gold and currency markets, but argues that it was the weakness of Britain's own financial warfare machinery that explains the lack of sustained pressure placed on the Swiss government, national bank and financial sector.Less

Civil War Finance and the American State

Samuel DeCanio

in Democracy and the Origins of the American Regulatory State

This chapter examines the influence of Civil War finance policy on American state formation. More specifically, it considers the two financial instruments used by the Treasury Department to fund the ... More

This chapter examines the influence of Civil War finance policy on American state formation. More specifically, it considers the two financial instruments used by the Treasury Department to fund the Northern war effort: the “greenback” paper currency and the national banking system. It first discusses Eastern financiers' preferences, particularly those of New York banks associated with the New York Clearing House Association, regarding the federal government's funding strategies. It then explores how voter ignorance influenced the Democrats' shift to supporting inflationary currency policy in the elections following the Civil War. It also shows how greenbacks and the national banking system unintentionally helped establish federal control over the money supply, giving rise to a regulatory state that is bureaucratic in nature.Less

The Evolution of Bank Boards of Directors in New York, 1840–1950

Howard Bodenhorn and Eugene N. White

in Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective

Contemporary bank governance is criticized for manager-dominated (insider) boards of directors; but this was also a characteristic of early nineteenth century banks, where the roles of president and ... More

Contemporary bank governance is criticized for manager-dominated (insider) boards of directors; but this was also a characteristic of early nineteenth century banks, where the roles of president and chairman of the board were typically combined. However, these boards were constrained by rules that tended to better align the interests of management, shareholders and other stakeholders. Focusing on New York State, which preserved a wealth of archival materials, we collected balance sheets, articles of association, and certificates of incorporation for state-chartered banks. Coupled with published information, these sources yielded a panel of data for 1840-1950, covering the Free Banking, National Banking, Early Federal Reserve and New Deal regimes. We document the evolution of New York banking law and two phenomena. First, we find a steady decline in the size of boards over time, from 12 to 13 in the 1860s to half that number by the mid-twentieth century that may reflect streamlined internal governance. Secondly, our analysis reveals that, in the beginning, board members were the dominant owners, accounting for over half the shares on average; but, as banks grew in size, this declined. Yet, these individuals still had holdings large enough to strongly influence governance.Less

“The Great Regulating Wheel” and Institutional Conversion

Eric Lomazoff

in Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic

This chapter examines the second of two changes within the Bank of the United States that would have downstream consequences for the debate over its constitutionality: its conversion from a purely ... More

This chapter examines the second of two changes within the Bank of the United States that would have downstream consequences for the debate over its constitutionality: its conversion from a purely fiscal auxiliary of the federal government to an institution with both fiscal and monetary functions. Between 1791 and 1811, not only did the number of state-chartered banks increase – the subject of Chapter 2 – but the Bank of the United States gradually developed and exercised the power to regulate their lending behavior and thereby control the nation’s money supply. The chapter explains how a combination of constitutional structures, federal and state policy choices, and early Treasury Department rules facilitated this functional evolution in the national bank. It also chronicles the early reception of the national bank as a monetary force, which featured dueling perspectives on the desirability of state bank regulation but was largely devoid of commentary on its constitutionality.Less

The Compromise of 1816

Eric Lomazoff

in Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic

This chapter chronicles the events that led to, and the constitutional claim that underwrote, the Republican majority’s revival of a national bank in 1816. The conventional wisdom surrounding this ... More

This chapter chronicles the events that led to, and the constitutional claim that underwrote, the Republican majority’s revival of a national bank in 1816. The conventional wisdom surrounding this period identifies both the problem that revival was designed to solve (the federal government’s ability to finance wartime operations) and the rationale for Republicans’ constitutional about-face on a national bank (President Madison had waived the question in 1815 as “settled”). The chapter supplies alternatives on both points. It argues first that the motive for reviving the Bank was monetary, not fiscal; most state banks had suspended the payment of specie during the War of 1812, and had refused to resume payment after the Treaty of Ghent. It then suggests that leading Republicans offered a novel constitutional argument: insofar as a new Bank would help to restore the nation’s official money (i.e., specie) to circulation – that is, the institution would once again regulate state banks – chartering it represented an exercise of Congress’ power to “coin Money, regulate the Value thereof.” The chapter posits that Republicans gravitated toward this argument because it did not require them to fight anew amongst themselves over the meaning of the Necessary and Proper Clause.Less

“Banco Mania” and Institutional Drift

Eric Lomazoff

in Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic

This chapter examines the first of two changes within the Bank of the United States that would have downstream consequences for the debate over its constitutionality: its drift from a position of ... More

This chapter examines the first of two changes within the Bank of the United States that would have downstream consequences for the debate over its constitutionality: its drift from a position of industry dominance. Between 1791 and 1811, a variety of forces – the public’s desire for profitable investment vehicles, local support for (or opposition to) the opening of a national bank branch, and credit access problems within particular communities – led to the proliferation of state-chartered banks; their number increased from five to 102 during this period, and their aggregate capital from $4.6 million to $56.2 million. The chapter both chronicles this expansion of the American banking industry and explains how that expansion, when coupled with the national bank’s stasis (the size of the institution’s capital remained at $10 million throughout the period), set the stage for claims in 1811 that the Bank of the United States was even less “necessary” than it had been in 1791.Less

Carter Glass: 1858–1946: Unreconstructed Rebel

Edward Morris

in Wall Streeters: The Creators and Corruptors of American Finance

The chapter describes Congressman Carter Glass’s unexpected role in passing legislation to form a central bank.

Assessing America's Early Banks

Howard Bodenhorn

in State Banking in Early America: A New Economic History

Early American banking grew in accordance with overall economic growth. The one exception was the early 1830s, when a speculative wave poured over the U.S. and the banking sector grew more rapidly ... More

Early American banking grew in accordance with overall economic growth. The one exception was the early 1830s, when a speculative wave poured over the U.S. and the banking sector grew more rapidly than the aggregate economy. High credit demand drove up profits, which induced entry, induced capital investment, and increased capital leverage ratios. The speculative bubble burst in the late 1830s due to actions by the Bank of England. Banks failed in unprecedented numbers in the early 1840s. After 1843, banking and economic activity moved together. While the National Banking Acts of 1863 and 1864 rationalized the nation's banking system, they eliminated a number of the distinct regional attributes that had appeared under an earlier, more decentralized federalism.Less

The Trials of Post-Soviet Central Bankers

Juliet Johnson

in Priests of Prosperity: How Central Bankers Transformed the Postcommunist World

This chapter explores the intensive transformation of the Bank of Russia and the National Bank of the Kyrgyz Republic (NBKR). As the central bank of the largest, the wealthiest, and the most ... More

This chapter explores the intensive transformation of the Bank of Russia and the National Bank of the Kyrgyz Republic (NBKR). As the central bank of the largest, the wealthiest, and the most geopolitically important Soviet successor state, the Bank of Russia received a disproportionate share of international attention and assistance. Although the Bank of Russia itself gradually transformed along Western lines, the slow pace of complementary institution building, advising mistakes in the 1990s, and an increasingly authoritarian government made its work difficult and often counterproductive. As the central bank of a small, resource-poor state in Central Asia, the NBKR presented a fundamental challenge to the transnational central banking community. With early and consistent community access but unstable domestic conditions and few internal resources, the NBKR's experience demonstrated both the possibilities and the limits of internationally driven institutional transplantation.Less

“Too Big to Fail” before the Fed

Gary B. Gorton and Ellis W. Tallman

in Fighting Financial Crises: Learning from the Past

The clearing house also engaged in bailouts of large member banks during crises. This policy of “too-big-to-fail” was entirely voluntary and created a risk exposure for the clearing house membership. ... More

The clearing house also engaged in bailouts of large member banks during crises. This policy of “too-big-to-fail” was entirely voluntary and created a risk exposure for the clearing house membership. The bailout was a signal that the clearing house members were willing to take the risk suggesting that their information pointed to the bailed-out bank being solvent. The clearing house expressed the view that the failure of a large bank would be devastating and this was avoidable with a bailout.Less

More than a Constitutional Rerun

Eric Lomazoff

in Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic

This chapter addresses an oft-ignored episode in the national bank controversy: the recharter debate of 1811. The charter granted in 1791 ran for twenty years, and this left members of the Eleventh ... More

This chapter addresses an oft-ignored episode in the national bank controversy: the recharter debate of 1811. The charter granted in 1791 ran for twenty years, and this left members of the Eleventh Congress (1809-1811) in a position to decide the institution’s fate. The chapter argues that the question of the national bank’s constitutionality resurfaced in 1811, but the answers to that question offered something more than a constitutional rerun of 1791. It stresses that while ideological strife played a role here – some members of the Republican majority, whose partisan forebears had criticized the 1791 bill as unconstitutional, openly asserted in 1811 that a national bank was “necessary” for managing the federal government’s fiscal affairs – the most important factor was the recent proliferation of state-chartered banks. Whereas critics of the 1791 bill had deployed a variety of claims respecting the meaning of the word necessary, most anti-recharter Republicans in 1811 converged upon a single argument: not only was a national bank too far removed from any enumerated power, but even if that problem could be overcome, the federal government’s ability to utilize a network of state banks for managing its fiscal affairs rendered the institution something less than “necessary.”Less

Varieties of Strict Interpretation

Eric Lomazoff

in Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic

This chapter offers a reexamination of the 1791 debates within Congress and the executive branch over Alexander Hamilton’s national bank bill. It jettisons a key feature of the traditional narrative ... More

This chapter offers a reexamination of the 1791 debates within Congress and the executive branch over Alexander Hamilton’s national bank bill. It jettisons a key feature of the traditional narrative surrounding those debates, namely the idea that all national bank opponents (a crowd that included, but was not limited to, James Madison and Thomas Jefferson) adopted a single, “strict” interpretation of the Necessary and Proper Clause. The chapter argues that there were actually varieties of strict interpretation, with different national bank opponents embracing different understandings of what it meant for means to be “necessary” for achieving ends. It does this first by distinguishing between (1) functional, (2) federal, and (3) frequency-based standards of necessity, and then by demonstrating how national bank opponents used different combinations of these standards to generate various tests for necessity.Less

A Tale of Two Clauses

Eric Lomazoff

in Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic

This chapter reexamines the closing episode in the national bank controversy: President Jackson’s extended assault upon the institution (1829-1832). The traditional narrative respecting the ... More

This chapter reexamines the closing episode in the national bank controversy: President Jackson’s extended assault upon the institution (1829-1832). The traditional narrative respecting the constitutional action from this period focuses on Jackson’s July 1832 veto of a bill to extend the national bank’s charter, and highlights both his written rejection of McCulloch v. Maryland (1819) as a definitive resolution of the national bank’s constitutionality and his attending claim that the institution was neither “necessary” nor “proper.” The chapter revises this narrative by drawing attention to the importance of the Coinage Clause in both the events that led to Jackson’s veto and the veto message itself. It posits that (1) the Democratic majority in Congress relied upon the power to coin money in passing a bill to extend the national bank’s charter, and (2) that reliance forced the president to explicitly reject the Coinage Clause argument in his veto message. In doing so, the chapter reveals that the power to coin money was relevant to the national bank controversy long after the events of 1815 and 1816.Less

The Emergence of Partisan Politics: The “Republican Interest”

Stanley Elkins and Eric McKitrick

in The Age of Federalism

The twelve-month period from the fall of 1791 to the fall of 1792 was marked by the emergence of what could for the first time be clearly discerned as an opposition. The opposition impulse was in ... More

The twelve-month period from the fall of 1791 to the fall of 1792 was marked by the emergence of what could for the first time be clearly discerned as an opposition. The opposition impulse was in reaction to the rising influence of the Treasury over administration policy, and to the fierce urge of Thomas Jefferson and James Madison to prevent the completion of Alexander Hamilton's grand design. They would partially succeed, and in the course of their efforts all the hostilities that had been accumulating since Hamilton's plans first began unfolding late in 1789 would burst fully into the open in bitter partisan warfare. Madison's attempt to prevent the establishment of a national bank had been no more fruitful than his effort to discriminate between original and current holders of Continental securities or his campaign to kill assumption. Hamilton had as of yet no idea of the frustrations George Hammond would encounter at the hands of Secretary Jefferson.Less

The Politics of European Integration

Juliet Johnson

in Priests of Prosperity: How Central Bankers Transformed the Postcommunist World

This chapter analyzes the Hungarian, Czech, and Slovak central banks in depth, tracing their extensive transformations and surprising difficulties with internalization in the context of the European ... More

This chapter analyzes the Hungarian, Czech, and Slovak central banks in depth, tracing their extensive transformations and surprising difficulties with internalization in the context of the European integration process. Hungary represented the best-case scenario, the country that began in the most advantageous political and economic position. Strong leadership and well-paid, well-educated staff made the Magyar Nemzeti Bank (MNB) an ideal candidate for transformation. Not surprisingly, the MNB developed rapidly with community support, particularly in terms of monetary policy and research. Meanwhile, the paired case study of the Czech and Slovak central banks reveals the leveling capabilities of international assistance. Although the Czech National Bank retained the vast majority of the State Bank of Czechoslovakia's experienced staff after the country's split, with the help of the transnational central banking community, the National Bank of Slovakia quickly gained ground on its richer relation.Less

Business Titan: The Douglass National Bank and the Victory Life Insurance Company

Robert E. Weems Jr.

in The Merchant Prince of Black Chicago: Anthony Overton and the Building of a Financial Empire

This chapter examines how Anthony Overton dramatically diversified his financial interests during the 1920s. In 1922, Anthony Overton assumed the presidency of Chicago’s Douglass National Bank (the ... More

This chapter examines how Anthony Overton dramatically diversified his financial interests during the 1920s. In 1922, Anthony Overton assumed the presidency of Chicago’s Douglass National Bank (the second black-owned bank to receive a national charter). Two years later, Overton started the Chicago-based Victory Life Insurance Company. In 1927, Victory Life became the only black-owned insurance company granted the right to conduct business in New York State. Following this business coup, Overton, in some circles, became regarded as “the merchant prince of his race.” To further enhance his growing status as a business magnate during the 1920s, Overton built two major commercial structures in the heart of black Chicago’s commercial district (the Overton Building and the Chicago Bee Building).Less

McCulloch (1819) in the Shadow of the Compromise

Eric Lomazoff

in Reconstructing the National Bank Controversy: Politics and Law in the Early American Republic

This chapter offers a reassessment of the Supreme Court’s work in McCulloch v. Maryland (1819) in light of the previous chapter’s claim that Republicans revived the national bank on the strength of ... More

This chapter offers a reassessment of the Supreme Court’s work in McCulloch v. Maryland (1819) in light of the previous chapter’s claim that Republicans revived the national bank on the strength of the Coinage Clause. After observing that Congress’s power (or lack thereof) to charter a national bank was not originally part of the dispute between the institution’s Baltimore branch and the state of Maryland – it was added to the Court’s agenda at the last minute – the chapter finds that Republicans’ Coinage Clause argument from 1816 was mentioned in neither McCulloch’s oral arguments nor Chief Justice John Marshall’s decision for the Court. Insofar as Marshall’s decision rested (at least in part) upon claims about the meaning of the Necessary and Proper Clause, what emerged in 1819 was a gap between political and judicial understandings of the national bank’s constitutionality. The chapter then unpacks the implications of this fact, concluding that while the Court’s holding was “majoritarian” (i.e., it aligned with the preferences of the Republican majority), its reasoning was surely not (i.e., Marshall’s commentary on the meaning of the Necessary and Proper Clause could only serve to exacerbate divisions over the scope of federal power within that majority).Less