Fourth National Bank

The Gilded Age in US history spans from roughly the end of the Civil War through the very early 1900s. Mark Twain and Charles Dudley Warner popularized the term, using it as the title of their novel The Gilded Age: A Tale of Today, which satirized an era when economic progress masked social problems and when the siren of financial speculation lured sensible people into financial foolishness. In financial history, the term refers to the era between the passage of the National Banking Acts in 1863-64 and the formation of the Federal Reserve in 1913. In this period, the US monetary and banking system expanded swiftly and seemed set on solid foundations but was repeatedly beset by banking crises.

The Civil War also brought vast changes to the nation's financial system. Before the Civil War, the federal government did not issue paper money. Instead, paper notes were issued by more than 1,500 state banks in 1860, which issued more than 10,000 different kinds of currency.

To end this chaotic system and to impose federal regulation on the financial system, Congress enacted two important pieces of legislation. The Legal Tender Act of 1862 authorized the federal government to issue paper money. Because these notes were printed on green paper, they became known as greenbacks. A pure fiat paper currency, unbacked by silver or gold, the greenbacks were widely reviled.

Greenbacks began to depreciate in terms of specie almost as soon as they were issued. In an attempt to drive up the price of government bonds, Secretary Chase eliminated the convertibility of greenbacks in July 1863, an act which simply drove down their value further. Chase and the Treasury officials, instead of acknowledging their own premier responsibility for the continued depreciation of the greenbacks, conveniently placed the blame on anonymous "gold speculators." In March 1863, Chase began a determined campaign, which would last until he was driven from office, to stop the depreciation by controlling, assaulting, and eventually eliminating the gold market.

The National Bank Act of 1863 created the nation's first truly national banking system. As finally adopted by Congress, the National Banking Act of 1863 chartered national banks which met certain requirements, made the notes of national banks legal tender for all public and private debts, and levied a tax of 2 percent on state bank notes, which gradually increased over time. By imposing a tax on state bank notes, the federal government forced state banks to join the federal system. By 1865, national banks had 83 percent of all bank assets in the United States. After 1870, interestingly, state banks made a comeback; they avoided the tax on their bank notes by issuing checks.

The National Banking Acts destroyed the previously decentralized and fairly successful state banking system, and substituted a new, centralized, and far more inflationary banking system under the aegis of Washington and a handful of Wall Street banks. The National Banking System created three sets of national banks: central reserve city, which was only New York; reserve city, other cities with over 500,000 population; and country, which included all other national banks. The whole nation was able to inflate uniformly and relatively unchecked by pyramiding on top of a few New York City banks.

The National Banking System was in great need of a mighty bank in New York City to serve as the base of the inflationary pyramid for a host of country and reserve city banks. Jay Cooke was happy to oblige, and he quickly established the Fourth National Bank of New York, capitalized at a huge $5 million. The mighty House of Cooke — "stunted and dwarfed" by the market economy — soon crashed and went bankrupt, touching off the Panic of 1873.

At the time, New York City was the center of the financial system. Between 1863 and 1913, eight banking panics occurred in the money center of Manhattan. The panics in 1884, 1890, 1899, 1901, and 1908 were confined to New York and nearby cities and states. The panics in 1873, 1893, and 1907 spread throughout the nation. Regional panics also struck the midwestern states of Illinois, Minnesota, and Wisconsin in 1896; the mid-Atlantic states of Pennsylvania and Maryland in 1903; and Chicago in 1905. By the beginning of the 20th century, the debate about monetary policy and the nation's financial system had been going on for over a century. Increasingly, the shortcomings of the existing system were causing too much harm to ignore. Like a drumbeat, the country experienced one serious financial crisis after another, with major crises in 1839, 1857, 1873, 1893, and finally in 1907. These panics paralyzed the financial system and led to deep and extended contractions in the economy.

These episodes exposed the weakness of the 19th century financial system, which repeatedly failed to supply the money and credit needed to meet the economy's demands. The financial system came under severe stress when the demand for liquidity surged.

A financial system strained in such a manner is like dry kindling in danger of being exposed to a spark. That spark could come from losses at a well-known bank, from a disappointing harvest, or from mere rumors. In response, depositors or other investors would seek the return of their funds, which would force financial institutions to sell assets quickly to generate the necessary cash. That liquidation could lead banks to cut credit and force borrowers to repay debt sooner than expected.

The adjective “gilded” means covered with a thin gold veneer on the outside but not golden on the inside. In some ways, this definition fits the nineteenth century banking and monetary system. The gold standard and other institutions of that system promised efficiency and stability. The American economy grew rapidly. The United States experienced among the world’s fastest growth rates of income per capita. But, the growth of the nation’s wealth obscured to some extent social and financial problems, such as periodic panics and depressions.