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For the last several years congressional committees and presidential task forces have been nattering back and forth about what should be done to change the legal order that establishes and specifically empowers and regulates the nation’s banks. They have dealt with their subject as a collection of technical problems they could solve: a bit of oil here, a tightened bolt there, a replacement for a blown gasket—and the old machine will be as good as new. But, in fact, our banking problems are systemic: we need a new machine. Changes in the technology of data processing have made it easy for businesses that are not banks to perform the functions that—until recently—only banks could even attempt, let alone fulfill. And changes in the cost and speed of communications have demolished the barriers that once gave a decidedly local character to the money and credit Americans used in their getting and spending. A uniquely American institution is changing—not only on its face but also in its very innards; a significant factor in our history has come to the end of its time.

Banks have been a major force in forming the character of American economic—and, indeed, political—life. No nation in Europe has more than a few score corporations that conduct a banking business on the foundation of deposit taking; the United States has forty thousand. American history is replete with fights in the legislature over the nature and function of banks and the role of the government in creating and controlling the money supply; in Europe such matters have been left in the hands of technocrats. From Shays’ Rebellion to Jackson’s war on the Second Bank of the United States to Bryan’s crusade against gold to Woodrow Wilson’s fight for the Federal Reserve and Franklin Roosevelt’s intensification of bank regulation, all radical reform movements in the United States proclaimed a central mission to do something about the banks. Yet at the same time there has been, across the political spectrum, a protective feeling for the local bank as a community service—an enterprise formed, as George Washington’s friend and financier Robert Morris put it, by men “clubbing a capital together” to promote the prosperity of their neighborhood.

Banking came to Europe as part of a mercantile revolution: it was the manufacturers and traders in the cities who needed credit to sell their wares. They had access to gold coins —the specie that formed an international currency, for gold was accepted everywhere. Rather than keep such hoards sterile or take the time and risk of making loans themselves, they were willing to leave their balances in the safekeeping of bankers who interposed their guarantee of safety between depositor and borrower.

In colonial America an agrarian society had little need for money and did not see much of it. The colonial balance of trade was heavily negative, which meant that specie was forever draining out of the New World to pay for imports from the mother country. As late as 1813 Thomas Jefferson wrote of neighboring tobacco farmers who drew supplies from regional merchants all year, on the strength of the tobacco crop they consigned to the same merchants after the harvest, and never saw or needed a dollar in cash. And the merchants themselves lived in a credit economy where all sums were book entries: their London suppliers shipped them goods on the strength of the merchants’ promises to ship tobacco later in the year.

The banks formed in the Colonies —and there were some, usually called loan offices—backed their issue of bank notes with pledges of the land that was the real wealth of the new society. Such notes could not be circulated at anything like their face value outside the town where they were issued. Even locally there was, in effect, no way to redeem them, as the notes had neither specie nor mortgages behind them and the land itself was not readily divisible. Bray Hammond, the long-term assistant secretary of the Federal Reserve Board, who in his spare time became the great historian of American banking, pointed out that these were almost always merchants’ banks. The essentially self-sufficient farmers had little need for credit and disliked the idea of being paid for produce in paper money. Not until a hundred years after the Revolution did farmers become agitators for inflationary monetary policies that would raise the price of their crops and thereby make it easier for them to pay the debts they had incurred in buying the newfangled machinery of the nineteenth century and to expand their land holdings.

The first bank actually begun with specific government approval in the United States was the Bank of North America, chartered in 1781 by the Continental Congress to Robert Morris, a rich, English-born, Philadelphia patriot who would be able to multiply his contribution to the cost of defeating Cornwallis by issuing the notes of such a bank. (These were much more likely to be accepted by purveyors to Washington’s army than were the notes of the Continental Congress itself, already selling at a severe discount and on their way toward evoking the disgust embodied in the longused cliché that something is “not worth a Continental.”) The war would end before this bank actually got into operation, but there was still plenty of work for it to do in managing the debts of the Revolutionists and in establishing a national currency—paper that would be accepted not only by farmers and businessmen but also by as many as possible of the sovereign states themselves.