The Mystery of Banking

Central Banking in the United States III
229
National Debt May Be a National Blessing. The Debt is Public
Wealth, Political Union, Protection of Industry, Secure Basis for
National Currency
.
9
2. T
HE
N
ATIONAL
B
ANKING
E
RA AND THE
O
RIGINS
OF THE
F
EDERAL
R
ESERVE
S
YSTEM
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 pyra-
miding 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.
10
The major effect of the Panic of 1873 was to cause bankrupt-
cies among overinflated banks and in railroads that had ridden
the tide of vast government subsidy and bank speculation. In par-
ticular, we may note the poetic justice meted out to the extraor-
dinarily powerful Jay Cooke. 
By the late 1860s, Cooke had acquired control of the new
transcontinental Northern Pacific Railroad. Northern Pacific had
received the biggest federal subsidy during the great railroad
boom of the 1860s: a land grant of no less than 47 million acres. 
Cooke sold Northern Pacific bonds as he had learned to sell
government securities: hiring pamphleteers, for example, to write
9
See Sharkey, 
Money, Class and Party
, p. 247.
10
John J. Klein, 
Money and the Economy
, 2nd ed. (New York: Har-
court, Brace and World, 1970), pp. 145–46.
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propaganda about the alleged Mediterranean climate of the
American Northwest. Many leading government officials and
politicians were on the Cooke/Northern Pacific payroll, including
Rutherford B. Hayes, Vice President Schuyler Colfax, and the pri-
vate secretary of President Grant, General Horace Porter. 
In 1869, Jay Cooke expressed his monetary philosophy in
keeping with the grandiose swath he was cutting in American eco-
nomic and financial life. “Why,” he asked, 
should this Grand and Glorious country be stunted and
dwarfed—its activities chilled and its very life blood curdled
by these miserable “hard coin” theories—the musty theories
of a bygone age. These men who are urging on premature
resumption know nothing of the great and growing west
which would grow twice as fast if it was not cramped for the
means . . . 
But four years later, the overbuilt Northern Pacific crumbled, and
Cooke’s government bond operation collapsed. And so the mighty
House of Cooke—“stunted and dwarfed” by the market econ-
omy—crashed and went bankrupt, igniting the Panic of 1873.
11
In each of the banking panics after the Civil War, 1873, 1884,
1893, and 1907, there was a general suspension of specie pay-
ments. The Panic of 1907 proved to be the most financially acute
of them all. The bankers, almost to a man, had long agitated for
going further than the national banking system, to go forward
frankly and openly, surmounting the inner contradictions of the
quasi-centralized system, to a system of central banking. 
The bankers found that the helpful cartelization of the
national banking system was not sufficient. A central bank, they
believed, was needed to provide a