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U.S. History/Followup on the National Bank and the Federal Reserve


QUESTION: Thank you so much for going above and beyond in giving me some background information on banking. I'm still fairly new to this website, and so I do not know whether there is a limit on the number of followup questions that I can ask. But I did not see an option to ask a follow up question, so I am opening a new one. I hope that is okay!

I'm now wondering whether the Bank of the US and the Federal Reserve have been unique in their ability to make loans to other banks or if regular banks are also capable of doing so. I assume the latter, but do not know for certain.

Your statement that the Bank of the US held "a great amount of leverage" over other banks through making loans to them seems to imply that - even if the Bank of the US was not the only bank in the nation capable of making loans to other banks - there was at least something special about receiving a loan from the Bank of the US. Was it just because the Bank of the US (as the depository of federal tax revenues) had a greater amount of money at its disposal with which to make loans?

Your answer regarding the Treasury makes perfect sense! However, going back to some of the details that you described in your very first response, you said that the Bank of the US would use tax revenue that had been deposited with it to make loans to the government - so once again, it almost seems as though the government was loaning money to itself. If the tax revenues that the federal government had deposited with the Bank of the US still technically belonged to the federal government, then couldn't the federal government have simply made a withdrawal rather than having to take out a loan?

ANSWER: Any private bank can generally lend to any other bank if it is so inclined.  There are few restrictions on who can be a load recipient other than the fiduciary responsibility to pay it back.  That said, most banks don't typically lend to other banks.  They are already in the retail lending business.  Why would they lend to a bank on a routine basis.  That is a bit like Shoprite selling groceries to Acme.  If a bank was in real distress and needed a loan, it might happen.  But more likely the other bank would take advantage of the situation to take over the bank in distress.  So while banks could lend to each other, I don't think it was a particularly common practice.

The Bank of the US had power because it had so much money from the Federal deposits.  Back at the time it existed, this was even more of a benefit than now since there was not any competition in the form of other large private banks.  There were very few corporations with large amounts of money and even wealthy individuals tended to have most of their wealth tied up in non-liquid assets.

Typically, the government would draw on revenues before taking out loans.  But you also have to consider that the government has almost always been in debt, other than a few years in the Jackson Administration.  So typically the government would be borrowing money, with most deposits held in the bank for short periods until needed.

- Mike

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QUESTION: Thank you for still being willing to go over this with me! I wasn't sure whether I would be able to understand all of this, but I think I'm getting close.

Can I recap on interbank loaning, just to make sure that I understand correctly?

It sounds like you're saying that banks were capable of making loans to each other during Washington's time, but generally didn't, as there would have been little reason for them to do so. However, the Bank of the US would make loans to banks somewhat more regularly, as it had such a great amount of money from which it could draw.

The main reason for why a bank during that time would have wanted a loan from the Bank of the US, would have been if said bank was really struggling; rather than doing a take over, the Bank of the US would give out a loan to keep the struggling bank afloat.

Today, there are banks large enough to make loans to struggling banks, but unlike the Bank of the US, these banks would likely just take over the struggling banks.

Is all of that right? Or have I misunderstood some things?

Regarding the government taking out loans from the Bank of the US - I'm still not sure that I completely understand how this would happen. I suppose that the Bank of the US must have had additional money with which to make loans, other than just the tax revenues that the federal government had deposited with it. I tried recently to figure out what all of the different sources are from which a bank can draw when making loans, but did not find a very clear answer. At the very least though, the bank must have received interest payments on loans that it had made.

Did the Bank of the US receive deposits from other sources other than just the federal government?

ANSWER: I may have given the wrong impression about the Bank of the US Role with other banks.  Yes, it had the ability to lend money to other banks, and did so on occasion, but that really was not a major function of the bank.  Other banks did not rely on the Bank of the US to borrow money.  They took in money from depositors and investors.  The Bank of the US operated like any other retail bank directly lending money to individuals and businesses.  There were times when it extended credit to other banks, although in doing so it was looking to maximize its own financial benefit, not save the economy.  For example, in 1819, there was a major bank panic.  The Bank of the US refused to extend any credit to other banks as it was worried about its own solvency.  As a result a great many banks went bankrupt.

The Bank of the US had a great amount of influence on banking generally because it was so much larger and had so much more funds than other banks.  It did not really have any need or desire to keep other banks afloat, although it could do so if it wished.  I cannot give you a specific example of it doing so.  The main way the Bank of the US influenced other banks was through manipulation of their bank notes.  If the Bank wanted to slow the growth of the money supply and credit, it could demand specie for the bank notes of other banks it accumulated in the normal course of business.  If it wanted a looser supply, it could simply hold onto those notes.

In later  years, some private banks did take over other struggling banks.  Today that happens differently.  If a bank is in trouble today, the FDIC takes over the bank to ensure as much repayment as possible to depositors from bank assets.  The FDIC might then sell or auction off bank assets to other banks.  Some banks do acquire other banks directly through mergers but once a bank is in real trouble the FDIC is going to get involved.

To explain how the government borrowed from the Bank of the US, don't think of it like the government walking into the bank and filling out a loan form to ask for money.  The bank was more like an open line of credit.  This may be over simplified, but think of it like this:  As tax revenues came in, the bank deposited that money in the government's account.  As the government had expenses such as paying government workers or buying supplies, it would draw on those accounts.  If an account went into the negative, the government paid interest.  If the account was positive, the bank paid interest on the deposits.  

The Bank also performed other functions for the government such as providing debt service (i.e. payments) to government loans from foreign countries.  And yes, the Bank did get funds from other sources.  When the bank was initially chartered with a $10 million capitalization, $8 million came from private investors and only $2 million from the government.

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QUESTION: Hmm...okay. So let me try again:

During Washignton's time, both the Bank of the US and regular banks were capable of making loans to other banks, but would rarely do so. On the irregular occasions that such a loan would actually be made, it would typically have been extended to a struggling bank. However, the Bank of the US had no interest in protecting struggling banks from failure in these instances and rather simply saw good business opportunities.

Is that right? I'm a little bit confused, because first you said that "most banks don't typically lend to other banks...[but] if a bank was in real distress and needed a loan, it might happen." You've also said that the Bank of the US *did* make loans to other banks on occasion. However, then you said that you cannot think of a single instance in which the Bank of the US kept another bank afloat.

You've done an excellent job of explaining all of this (a much better job than most people that I've brought economic questions to) and I feel that the problem may simply lie in me misinterpreting the wording of something that you've written.

I have a few more questions based on the information above and hope that I'm not wearing you down. However, I'm going to hold off on them for now, as I think that it will be easier for me to digest all of this in smaller bits.

Thank you again Mike! :)

I have to confess some ignorance and answering your question with the accuracy you seem to want.  I know the bank of the US could lend to other banks and that it did at least on some occasions.  I also know that this was not its primary function.  But as to how often it happened for banks in distress or not in distress I cannot say for certain.  For that level of detail someone would have to go through the original bank records and make a determination that I cannot.

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Michael Troy


I can answer just about any question on early American History. My specialties are the American Revolution through the Civil War/Reconstruction. I also have greater expertise in matters relating to military, political or legal history.


I have lectured at George Washington University regarding the Civil War, as well as several elementary school Civil War demonstrations. I was also a member of a Civil War reenactment group for about 10 years.


J.D. University of Michigan B.A. George Washington University

Awards and Honors
Truman Scholar

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