I've been hearing the phrase recently that Alexander Hamilton is considered the "father of modern banking", but haven't really come up with any explanation or definition that I can really understand how this came to be attributed to him. From my studies of American Colonial history and after, I know Hamilton was a proponent of industry, debt and a central bank that he fought long and hard for. Is there a real definition for "modern banking"? If so, how is this different than other financial systems in use at the time?
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Great question. At this point I would suggest that "modern banking" is hardly a reflection of either Alexander Hamilton's advocacy/implementation of a central banking system or other financial systems in use at the time (throughout the world), including those later established by Hamilton himself. Regardless of wether the banks were privately owned, government owned or both; it does not appear to me that the operations and restrictions of the banks of that era are represented in today's banking system. Again great question!– E1SuaveCommented May 31, 2012 at 14:25
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Thanks! This has been bugging me more of late since I keep seeing commercials with actor portrayals of Hamilton and a lot of references to him as the father of modern banking. There are far more rules now on banks than when he created the First Bank of the United States but I put that on the fact that it was a new country and no one had done this before.– MichaelFCommented May 31, 2012 at 16:43
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1@MichaelIF Two factors are hugely different though. Our currency is no longer backed by precious metal(s), and loans as we utilize them were never utilized by the banking system in Hamilton's era. (Note: these two factors are not the only differences just two that come to mind)– E1SuaveCommented May 31, 2012 at 17:17
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@E1Suave I was aware of the precious metals, but not the loans part. Interesting.– MichaelFCommented May 31, 2012 at 17:27
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1If you're interested in the subject I highly recommend Ron Chernow's biography of Hamilton. It's a good balance of vivid, colourful details about the man himself with an overview of his role in developing American finance and public credit. He's an incredibly important figure in American history, but widely underappreciated by the popular culture.– Evan HarperCommented Aug 6, 2012 at 9:51
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3 Answers
One unique characteristic of Hamilton's Bank of the U.S. (BUS) was that the government only had a 20 percent ownership of the bank, but the government had the right at all times for reports and status on the operation of the bank. Hamilton was concerned that government officials would be tempted to use the bank to give/gain favors politically...so he found this solution. Two good books on the Modern Banks are "Financial Founding Fathers" (Wright/Cowan) and "One Nation Under Debt" (Wright). The Museum of American Finance is a terrific resource and visit spot in lower Manhattan (48 Wall St). Rand Scholet, Founder of the Alexander Hamilton Awareness Society (The-AHA-Society)
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Giving you the win here for the book references, those look good.– MichaelFCommented Jun 27, 2012 at 15:16
He pushed for a private and independent central bank, the First Bank of the United States. It was similar to the Bank of England, except he expected it to loan money to private institutions and businesses as well as perform its government duties. He also founded the Bank of New York, which was a private lending institution similar to modern commercial banks.
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Though I agree with your answer I am not sure it entirely answers the OP's question. " Is there a real definition for "modern banking"? If so, how is this different than other financial systems in use at the time?– E1SuaveCommented May 31, 2012 at 14:58
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1Completely agree he did this, though it's not exactly answering my question unless these banks were doing things differently than say the Bank of England. If they were what are those specific differences?– MichaelFCommented May 31, 2012 at 16:41
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@ MichaelF - The bank he designed was privately owned and loaned to commercial and private interests - it was a way of establishing credit for the new Republic and American industry, agriculture and shipping. The BoE was Britain's private banker - it would collect and store taxes, make short term loans to the government and manage the receipt and disbursement of government funds, but not loan those funds to commercial interests or provide services to other financial institutions. Hamilton's bank served both the government and private commerce. Commented May 31, 2012 at 17:32
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@RISwampYankee This is a good comment you should incorporate into your answer, it helps round it out.– MichaelFCommented Jun 2, 2012 at 10:43
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3So, basically he founded or started the modern American banking system.– DaleCommented Jun 6, 2012 at 1:30
Alexander Hamilton is given credit as the "father of modern banking" because he pushed hard for a British-style central federalist system, created the first central bank in the US and was the 1st US Secretary of the Treasury. Basically he laid the foundations for the modern Federal Reserve.
modern banking
The banking systems of the major economic powers in the late C18th, early C19th were pretty similar to how they are today. If you consider the Commonwealth spanned more than half the world and followed English Common Law (it still does) there weren't major structural differences in how banks operated globally (except catholics, muslims). The practices we think of as modern banking originated with the Argenta'rii over 2000 years ago. The evolution of banking regulation in the USA largely occurs due to responses to financial crises, some might say it only occurs in this way. The central bank is a reactive political entity, it doesn't pre-empt politics or markets. For Common Law countries, the only real differences between national economic systems throughout history are down to which crises they had to face and when.
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The definition of "modern banking" is subjective but I would argue modern banking originated in the USA in 1998, was ratified by Congress in 1999 and became de-facto law throughout the Anglo-American world (USA, UK, EU, Japan) thereafter. The difference was the combination of commercial, insurance and securities activities under one roof, which prior to 1999 was illegal for everybody except Citigroup (Citi + Travellers').
Another era-change for "modern banking" was the deregulation of OTC derivatives, which transferred from the office of the CFTC to a self-regulatory framework drawn up by a cartel of major banks. A "Modern Bank" is a market-maker (issue, warehouse, buy and sell the same security), regulator, appraiser, market indicator, lender, investor, private consultancy firm, underwriter, insurer, lobbyist, government contractor and supplier. Prior to 1998 these tasks were performed by separate entities and prior to 2000 these vast OTC channels did not exist/were regulated by the CFTC/SEC
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Banking has as many eras as you care to make distinctions for. In the era of Alexander Hamilton, the "gold-standard" was in place. Confusingly the US used the "silver" standard in Hamilton's time (Spanish influence). The key is that the value of a currency was pegged to a physical commodity (gold/silver/tobacco) - you could not create new money without new raw materials. Wars (American Civil, WWI etc) brought the advent of "Fiat" currency, as the government required funding but could not mine or acquire sufficient raw materials. It's perfectly reasonable to argue "modern banking" started then or indeed when the USA permanently left the gold standard in 1971.
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You could argue fiat currencies originated much earlier than 1862 depending on how you choose to define "fiat". Wiki says China invented fiat currency around 1000 AD.
I define fiat as a permanent mental severing of the link between commodity and currency, something that's not strictly true about China circa 1000 AD. The Chinese had paper money but the value of the currency was still securitised by an underlying commodity (silk, precious metals), even if the currency itself was NOT directly convertible into commodities.
