The Challenge of Credit Supply investigates the major policy developments in banking and credit from 1650-1950 and the economic problem that each sought to address, their mechanics, impact, and shortcomings.  It asks which financial institutions were essential to support economic growth and which financial powers  were needed to achieve this goal.  By studying the relationship of each major development to the next, the reader gains an understanding of three hundred years of financial evolution.

John Winthrop Jr

John Winthrop Jr (1606-1676)

Part I discusses the financing challenges facing the American colonies from the 1650s to the 1760s.  It describes the problems leaders sought to address, the plan of Blackwell’s bank of 1687, and why it was short lived.  Absent a working bank, it reviews the rise in the use of bills of credit by the individual colonial governments as a general currency and as a basis for loans.  The qualities that made bills of credit successful or unsuccessful in serving their purposes are examined.

Part II presents the developments in credit policy from the Declaration of Independence through to the conclusion of the Washington Administration and their relation to the events and processes that transformed the newly independent states of America into a firm union.

alexander hamilton

Alexander Hamilton

The issues that weakened the credit of the Continental Congress are reviewed along with the remedy designed in the form of a Bank of North America.  The important role of the Bank in serving the Congress and the economy through the Treaty of Paris, its key credit characteristics, and the difficulties it faced from the effect of insufficient Congressional revenues are thoroughly reviewed.  An inspection is also made of the ineffective and burdensome tax system in place during and after the war.  

It is demonstrated that the design and drive for expanded federal power to raise taxes in order to fund the national debt was intricately related to the creation of a successful financial system.  The legislative steps taken in the 1790s to establish a bank-based funding system are reviewed in detail.  This system drastically reduced previous tax burdens, created an adequate supply of capital to support expanded credit, and a currency plentiful enough to facilitate the growth of commerce and trade.  

Part III reviews the period from the expiration of the first Bank of the United States in 1811 to the demise of the second Bank and its aftermath.  It describes the currency and credit crises which occurred during the War of 1812 as state banks tried with limited success to fill the place of the first Bank.  It follows the design of policies for restoring public credit and a plan for financial order developed by the Madison Administration involving a second Bank of the United States. 

second bank of the us

The second Bank of the United States

It shows that after an unfortunate beginning the second Bank was extremely successful in achieving its intended purposes.  The specific mechanisms and management practices that made it effective in supporting the growth of industry, infrastructure, and commerce are detailed.  The short and long range negative effects of utilizing state banks as depositories of federal revenues are reviewed as are the consequences of creating an enlarged demand for gold and silver that was contrary to established business and banking practices. 

Part IV is devoted to generating an in-depth understanding of the dramatic financial policy developments which took place during the Civil War.  The context for these wartime actions picks up from the creation of the Independent Treasury System and the rise of state banking in the 1840s.  The relation between the 1861-1863 planning for a federally controlled currency and banking system and the 1862-1865 wartime use of government bills of credit as a general currency is dissected in order to clarify the complications growing out of these measures in later years.

Part V is a step by step treatment of banking and currency developments under the National Banking System from 1865-1913.  The complicated factors that made these banking arrangements only partially successful are examined closely.  The failure to replace legal tender notes with national bank currency, the repeated recommendations by the Comptrollers of the Currency and others for improving the system, and the consequences of not implementing these suggestions are examined.

National Bank Note

A National Bank Note from 1878

The continual discord between an artificially restricted National Banking System, the Independent Treasury, and inelastic government currencies is discussed to show how each element contributed to the numerous credit contractions, financial crises, and depressions between 1868-1908.  In this way the problems of the National Banking System are made clear and the elements that were missing for a more functional system are brought into focus.

Part VI encompasses the period of 1913-1950. It discusses the founding of the Federal Reserve System and its key characteristics.  The focus is in particular on the limitation in the Fed’s discount and loan provisions which significantly worsened the Depression and slowed recovery.  The many different ways that this problem was addressed during 1934-1950 are reviewed in detail.  These included a number of proposed and actual amendments to the lending and discount powers of the Federal Reserve and the banking system.