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Throughout history, society has searched for more expeditious ways to pay
for goods and services. Shopping on the Internet, for example, is merely a more convenient way of shopping without leaving
your home. Similarly, early societies searched for ways to improve upon
the most ancient form of payment in history--bartering. With bartering,
you found a partner in a direct exchange of value. When you traded your
chickens for a cow, the exchange was immediate and final--no one wondered
whether sufficient funds were available to complete the transaction.
 But whatever the benefits in immediacy and finality of the
transaction,
bartering was impossibly inefficient: It required a significant investment
of time as individuals searched for willing participants with whom to enter
into an exchange of goods and services. To lower the costs attendant with
searching for trading partners, ancient societies eventually created commodities,
widely recognized as valuable, that could be exchanged for goods and services.
This was likely the case in the city-state of Lydia, which minted what is
believed to be the first coins some 3,000 years ago. Many commodities involved
some form of precious metal, but other commodities, as varied as the cultures
that engaged in commerce, also thrived. For instance, while we know that
Rome was not built in a day, you could say that Roman soldiers worked for
peanuts--salted, that is, since they were at one time paid in salt.
The agreement on a common medium of exchange and the organized issuance
of coins vastly improved the payments system of ancient times by standardizing
the value of money and allowing for convenient measures by varying the metal
content in the coins. But coins had obvious limitations, especially when
one attempted to conduct expensive transactions over long distances. The
13th century Chinese sought to resolve this problem by creating paper money.
This action required the Chinese emperor to issue two edicts: one that established
what paper currency was worth, the other that imposed the death penalty
on anyone found counterfeiting it.
As the Chinese innovation suggests, a more sophisticated payments system
was necessary to accommodate the complexities of commerce engaged in by
developing civilizations. This need was especially critical for early 17th
century Europe to support its burgeoning international trade and exploration.
The Bank of Amsterdam, established in 1609 and considered the first public
bank, was developed to serve the merchants of that booming city who found
it difficult to distinguish the precise bullion content in the silver and
gold coins being minted by numerous mints operating in the Dutch Republic.
The early successes of the Amsterdam bank stimulated interest in establishing
similar institutions in other European countries. The Stockholms Banco was
established in mid-17th century Sweden to engage in "lending" and "exchange"
banking. Although it acted as a private institution, its managers were appointed
by the government, and the Crown retained half its revenue. The bank's principal,
Johan Palmstruch, is recognized for developing notes of credit that allowed
the bank to better control the demand for its stock of copper coins, which
were the primary means of payment. These notes substituted for the hauling
of huge bags of copper coins to transact business; they quickly gained widespread
acceptance.
Although the bank failed in 1663, the Swedish government built upon the
country's banking experiences, and in 1668 the parliament chartered the
Bank of the Estates of the Realm. The government's influence and control
in establishing such a "national" bank was evident from day one, and the
bank evolved, like many of the pioneering efforts toward central banking,
as a commercial bank whose largest customer was the government. While it
would not acquire the attributes we associate with modern central banks
until much later, the Bank of the Estates of the Realm would eventually
evolve into Sweden's central bank, the Riksbank.
Like its European counterparts, the U.S. central bank evolved in response
to the needs of a payments system strained by the demands of a growing national
economy. But it would require more than 100 years to develop the institution
we recognize today as the Federal Reserve. The nation's first Secretary
of the Treasury, Alexander Hamilton, recommended to Congress that a national
bank similar to the Bank of England be established to provide banking services
to both the public and the government. The Bank of the United States was
chartered in 1791 and proved to be a valuable component of the nation's
flourishing economy: It not only competed as a commercial bank, but also
invoked market discipline on other banks by returning their notes promptly
for redemption. Such actions didn't endear the Bank to its private counterparts,
however, and political pressure mounted to close it.
In 1811, an extension of the bank's 20-year charter was resoundingly defeated
in Congress. Five years later, the Second Bank of the United States was
established, largely in response to the monetary disorder that followed
the War of 1812. It, too, was unable to overcome political opposition, and
an extension of its charter was vetoed by President Andrew Jackson in 1832. |
