Introduction to Finance

First Bank
(You write a check
on your account)
ABC Firm
Bank
Clearinghouse
Federal Reserve
Bank
Last Bank
(ABC Firm’s
deposit account)
Presented to
Check is
deposited
Check is mailed 
to ABC Firm
Presented
directly
Presented
through
Cleared
through
Presented to
FIGURE 3.4
 Traditional 
Methods for Processing Checks 
through the Banking System

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3.4 Historical Development of the U.S. Banking System
55
help us better understand how and why the system operates the way it does today. Second, to 
paraphrase the quotation at the beginning of Chapter 1, “Those who don’t study history are 
doomed to repeat its mistakes.”
Before the Civil War
Until the Civil War, banking in the United States developed under confusing and diffi
cult 
circumstances. The population lived for the most part on farms. Families were self-suffi
cient, 
and transportation and communications were poor. The friction between those who supported 
a strong central government and those who did not existed in the early years of U.S. history, 
as it does today. The country had little experience in money and fi nancial management, and 
much controversy raged over the power to charter and regulate banks.
Early Chartered Banks 
During the colonial period, small unincorporated banks were 
established to ease the shortage of fi nancial capital for businesses. Their operations consisted 
largely of issuing their own paper money. Outside of the larger towns, deposit banking was of 
minor signifi cance. It was not until 1782 that the fi rst incorporated bank, the Bank of North 
America, was created. It was established in Philadelphia by Robert Morris to assist in fi nan-
cing Revolutionary War expenditures. This bank set a good example for successful banking: 
its notes served as a circulating medium of exchange, it lent liberally to the U.S. government, 
and it redeemed its own notes in metallic coins upon demand. Two years later the Bank of 
Massachusetts and the Bank of New York were established. These three incorporated banks 
were the only such banks until 1790.