Abstract
Prior to the institution of the Federal Reserve, the US financial system was based on interactions between commercial banks (national banks), non-bank intermediaries (trust companies and, to some extent, unregulated state banks), financial markets, and the Treasury, which indirectly embodied tax and monetary policy. The stability of the system depended on the relationship between the money market and the financial market via non-bank brokerage. The structure of the system provided that bank reserves, whether or not they were subject to the National Banking Act, would be deposited in national banks in a pyramid structure providing greater levels of reserves going up the pyramid from the peripheral banks to the large reserve banks in big cities. These reserves were invested in the call loan market to fund the acquisition of stocks and bonds, thus connecting the money market and the capital market. This choice was partly justified by the fact that long-term financial assets were composed of easily liquidable secondary reserves added to primary reserves. The Panic of 1907 developed following a failed short squeeze that led to the bankruptcy of a major trust company. The trust companies had an asset structure with relatively low liquidity and a high level of leverage. The Panic involved financial intermediaries other than commercial banks, i.e., the trust companies, which then suffered a bank run. The national banks realized that they might be indirectly involved in the crisis because of the prevailing trend toward sales of financial assets, and so J.P. Morgan quickly rallied a number of bank presidents and organized a collective rescue operation that succeeded in stabilizing the market. But the awareness of the instability of the financial system strengthened the conviction that there was a need for a lender of last resort.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsBibliography
Admati, A. R., DeMarzo, P. M., Hellwig, M. F., & Pfleiderer, P. (2010). Fallacies, irrelevant facts, and myths in the discussion of capital regulation: Why bank equity is not expensive (Research Papers 2065). Stanford University, Graduate School of Business.
Andrew, A. P. (1907, August). The treasury and the banks under Secretary Shaw. The Quarterly Journal of Economics, 21(4), 519–556.
Bagehot, W. (1858, January). The monetary crisis of 1857. National Review. In W. Bagehot, The works and life (Vol. II, 1915).
Barnett, G. (1910). State banks and trust companies since the passage of the National Bank Act (Vol. VII). National Monetary Commission.
Bernstein, A., Hughson, E., & Weidenmier, M. (2014). Counterparty risk and the establishment of NYSE clearinghouse (NBER Working Paper 20459).
Breckinridge, J. (1908). The trust company: A necessity. Banking Law Journal, 25(4), 851–860.
Brewer, H. P. (1986). The emergence of trust company in New York City: 1870–1900. New York: Garland.
Bruner, R. F., & Carr, S. D. (2009). The panic of 1907: Lessons learned from the market’s perfect storm. New York: Wiley.
Carlson, M. (2013). Lessons from the historical use of reserve requirements in the United States to promote bank liquidity (Finance and Economics Discussion Series 11-2013).
Cleveland, F. (1908). The bank and the treasury. London: Longman, Green.
Conant, C. A. (1899). Securities as means of payment. American Academy of Political and Social Sciences,14, 25–47.
Conant, C. A. (1904). Wall Street and the country: A study of recent financial tendencies. New York: Putnam’s.
Conant, C. A. (1909). A history of modern bank of issue with an account of the economic crisis of the nineteenth century and the crisis of 1907. New York and London: Putnam’s.
Davis, L. E., & Gallman, R. E. (1994). Savings, investment, and economic growth: The United States in the nineteenth century. In J. A. James & M. Thomas (Eds.), Capitalism in context: Essays on economic development and cultural change in honor of R. M. Hartwell (pp. 202–229). Chicago and London: University of Chicago Press.
Dunbar, C. (1917). The theory and history of banking. New York: Putnam’s.
Eiteman, W. J. (1932, October). The economic significance of brokers’ loans. Journal of Political Economy, 40(5), 677–690.
Gendreau, B. C. (1983, November). The implicit return on bankers’ balances. Journal of Money, Credit and Banking, 15(4), 411–424.
Goldenwieser, A. (1932). The dual banking in the United States. Material prepared for the information of the Federal Reserve System by the Federal Reserve Committee on Branch, Group, and Chain Banking.
Gorton, G. (1985). Clearinghouse and the origin of central banking in the United States. Journal of Economic History,45(2), 277–283.
Gorton, G. (1999). Pricing free bank notes. Journal of Monetary Economics,44, 33–64.
Gorton, G., & Mullineaux, D. J. (1987). The joint production of confidence: Endogenous regulation and nineteenth century commercial-bank clearinghouses. Journal of Money, Credit and Banking, 19(4), 457–468.
Griffis, B. (1923). The New York call money market (A dissertation).
Hollander, J. H. (1913, December). The security holdings of national banks. The American Economic Review, 3(4), 793–814.
Hooper, S. (1860). An examination of the theory end the effects of law regulating the amount of species in banks. Boston: Little, Brown.
Jaremski, M. (2010). Free bank failures: Risky bonds versus undiversified portfolio. Journal of Money, Credit and Banking,42(8), 1555–1587.
Kinley, D. (1910). The independent treasury system of the United States and its relation with the banks of the country (Vol. VII). National Monetary Commission.
Laughlin, L. (1912). The banking reform. Chicago: The National’ Citizens League for the Promotion of a Sound Banking System.
McSherry, B., & Wilson, B. K. (2013). Overcertification and the NYCHA’s clamor for a NYSE clearinghouse. Quarterly Journal of Austrian Economics, 16(1), 13–26.
Michie, R. (1987). The London and New York stock exchanges 1850–1914. London: Allen & Unwin.
Moen, J., & Tallmann, E. (1992). The bank panic of 1907: The role of trust companies. The Journal of Economic History,52(3), 611–630.
Moulton, H. G. (1918). Commercial banking and capital formation: IV. Journal of Political Economy, 26(9), 849–888.
Noyes, A. (1893). Stock exchange clearinghouse. Political Science Quarterly,8(2), 252–267.
Pratt, S. S. (1912). The work of Wall Street. New York and London: Appleton.
Shleifer, A., & Vishny, R. (2011). Fire sales in finance and macroeconomics. Journal of Economic Perspectives, 25(1), 29–48.
Sprague, O. W. (1903, March). The New York money market. The Economic Journal, 13(49), 30–57.
Sprague, O. W. (1910). History of crisis under the national banking system. Washington, DC: National Monetary Commission.
[X]. (1860). The grievance of the discount houses.
Youngman, A. (1906). The growth of financial banking. Journal of Political Economy,14(7), 435–443.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2019 The Author(s)
About this chapter
Cite this chapter
Pizzutto, G. (2019). The US Financial System from the National Banking Act to the Panic of 1907. In: The US Financial System and its Crises. Palgrave Studies in Economic History. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-14489-0_2
Download citation
DOI: https://doi.org/10.1007/978-3-030-14489-0_2
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-14488-3
Online ISBN: 978-3-030-14489-0
eBook Packages: Economics and FinanceEconomics and Finance (R0)