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The Origins of the American Banking Industry

By Motley Fool Staff - Apr 1, 2016 at 1:12PM

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The current structure of the America banking industry dates back to the Civil War.

The American banking industry is one of the most convoluted in the world, with banks being charted at both the state and the federal levels. The origins of this bifurcated system date back to the Civil War, when two national banking acts cleared the way for the country to finance the conflict.

The Motley Fool's Gaby Lapera and John Maxfield discuss this in the video below, touching in particular on the role that banks play in financing wars.

A transcript follows the video.

This podcast was recorded on March 28, 2016. 

Gaby Lapera: Let me lay this out for you like I would one of the students that I used to tutor in college when they would really whiningly ask me why it's important to study history. History illustrates the themes of humanity and when I was growing up, when I was a kid, my father was a great believer in the classics, so all of my bedtime stories were about Roman legions and German philosophers and I don't know what. In the words of my father, because I believe most of our podcast listeners speak English and not Spanish, "Those who do not know history are doomed to repeat it." He doesn't actually sound like that, but he does have a deep voice and I have a high voice so I just ... That was my best impression. That was the best I could do.

So, banking. Banking in the United States. Complicated story. Maxfield and I were having a heated, well, a spirited discussion about the founding fathers and what their vision was for banking in the United States, and we both agreed that we were both Adams and Hamilton fans, so if you're a Jefferson fan ... I don't know what to tell you. The real history of U.S. banking started during the Civil War in the United States. Do you want to lead off with that, Maxfield?

John Maxfield: A couple things and just general points to keep in mind ... It's really easy to vilify banking and bankers. These guys just deal with other people's money is the famous saying, and they just get rich doing that. What's really important to remember is that banking is a really critical part of the growth of any economy. There's only three variables, ultimately, that dictate economic growth: labor, capital, and productivity. What banks do is provide capital. They are really, really important. ... Different countries have different ways that their banking systems operate and if you look at the United States banking industry and you want to know the origins of our current banking system, like Gaby said, you have to go back to the Civil War.

That's because before the Civil War, there were no national banks because -- to allude to that divide that Gaby was talking about -- you had the Jeffersonians on one side that were very opposed to big banks and big concentrations of money. You have the Federalists on the other side: George Washington, John Adams, Hamilton and all these guys.

Lapera: (cheering) Just in case you're curious about what side of the line I fall on.

Maxfield: I think we know. I think Gaby made it pretty clear where we kind of stand on this. In the Civil War, all that changed. National banks came into effect. They came into effect because the North needed money. The best way for a government to get money, in particularly at the time, was to go through banks, which would not only buy the bonds of a government, but then syndicate those bonds to other banks and to other investors.

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