It's crazy to think about it today, but there was once a time when the United States didn't have a central bank. And what's even crazier is the fact that the institutions that we know today as JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) were the leading banks that sought to fill this void.
The Motley Fool's Gaby Lapera and John Maxfield discuss this in the video below, by digging into the role that the predecessor entities to those modern banks played in the period from the Civil War to the Panic of 1907.
A transcript follows the video.
This podcast was recorded on March 28, 2016.
Gaby Lapera: It's expensive to industrialize. A lot of people don't think about this. Say you're a farmer during the Industrial Revolution. You have mechanization happening. If you are going from your horse and a plow to a tractor, that's a very expensive purchase. You need these banks to finance this for you, even on just an individual level.
John Maxfield: That's exactly right. The second piece to this whole thing is that because we did not have a Federal Reserve ... I guess because we didn't have central bank, we call it Federal Reserve, but it really is a central bank. Because we didn't have that, when the economy got into trouble, there was nobody there to bail the banks out and to help them out to survive these things -- to protect investors, to protect depositors' money, and all of these different things. What came about was that J.P. Morgan headed up a group, a triumvirate, if you will, of three different bankers. Himself, at the head of his firm, J.P. Morgan; a guy by the name of James Stillman, who was heading up City Bank of New York, which is now, you go through multiple iterations, that is now Citigroup, really the oldest of our big banks that traces its roots back to 1812; and the third member of this group was a guy named George Baker. He ran a bank called the First National Bank, which was literally the first national bank to get a charter under the banking acts of 1863 and 1864.
What these guys did ... They would get together and they would pool their resources of their banks, and then pull other banks into this pool that could then use that pooled money to save banks that were perfectly well-capitalized, but were experiencing runs by depositors. Let me just give a brief insight into how these bank runs happen.
The way that bank run happens is that you're sitting at home minding your own business, you hear that the bank you have your money deposited in has maybe made some bad loans, and you think it could fail. Well, you're going to go and get your deposits out, right? Everybody does the same thing, they take all this money away from the bank. Banks, because they're leveraged institutions, they can't convert loans into cash and then pay that back to their depositors quickly enough. What they do, nowadays, is they go to the Federal Reserve, they put those assets up for collateral, and they get cash. That's how they can satisfy their depositors.
At the time, there was no Federal Reserve, and that's what J.P. Morgan did, now it's called JPMorgan Chase, but that's what J.P. Morgan did, with George Baker of the First National Bank and with, what is today Citigroup, but at the time it was City Bank of New York.