THE NATIONAL BANKING ERA AND THE ORIGINS OF THE FEDERAL RESERVE SYSTEM - The Mystery of Banking

After the Civil War, the number of banks and the total of national bank notes and deposits all expanded and, after 1870, state banks began to expand as deposit creating institutions pyramiding on top of the national banks. The number of national banks increased from 1,294 in 1865 to 1,968 in 1873, while the number of state banks rose from 349 to 1,330 in the same period.

As a summary of the national banking era, we can agree with John Klein that The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of . . . reserve pyramiding and excessive deposit creation by reserve city and central reserve city banks. These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up.

The major effect of the Panic of 1873 was to cause bankruptcies among over inflated banks and in rail roads that had ridden the tide of vast government subsidy and bank speculation. In particular, we may note the poetic justice meted out to the extraordinarily powerful Jay Cooke.


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