British merchants provided the majority of the sources of money and credit during the colonial period of American history (1607-1783). The American colony served as a superb opportunity for British merchants. Itwas a new market for the growing British economy during the time. Colonial importers and wholesalers relied on credit from British suppliers while rural merchants received credit from importers and wholesalers in the port cities and, finally, consumers received credit from the retailers. (McCusker and Menard, 80n; Perkins, 24).
After the Declaration of Independence, the first commercial bankreceived a charter of incorporation: The Bank of North America, in 1781. This was a result of a resolution by the Continental Congress. However, there was doubt regarding the power of the Congress to permit the establishment of a bank. Thus, the Bank of North America also obtained charters from state authorities: the Pennsylvania legislature. In 1784, the Bank of Massachusetts and the Bank of NewYork were also formed. The primary function of these and later commercial banks was the making of short-term loans, which they did either by issuing their own bank notes or by creating a deposit in the name of the borrower (opening an account to the person's credit) and dispersing checks to draw against it. Therefore, banks had to maintain adequate reserves in order to pay on demand. Numerous bankswere forced into bankruptcy because they over expanded their loans and discounts (Fischer, 9).
In most states of the early federal union, bank organizers needed special permission from the state government to open and operate. For a while, the Bank of the United States also provided an additional layer of oversight (Fact). However, many were troubled by the fact that two-thirds of the bankstock was held by British interests. These critics, working with agrarian opponents of the bank, succeeded in preventing the renewal of the charter in 1811, and the First Bank went out of operation (Houghton).
Soon, however, problems associated with the financing of the War of 1812 led to a revival of interest in a central bank, and in 1816, the Second Bank of the United States wasestablished with functions very much like the first. However, this period (1811-1816) without a national bank, led to a large increase in the number of state banks. These were formed largely without restrictions or guidelines. The provisions of the charter of the Second Bank required the establishment of branches. By the fall of 1817, 19 branches in 14 different states were organized. The difficulties intransportation and communication at the time resulted in significant losses at these various branch locations. Local directors also often defied directions from headquarters and carried out their own policies. This widespread mismanagement influenced the onset of the panic of 1819 (Fischer, 12).
Popular resentment led to efforts by several states to restrict the Bank's operations, but in...