Key Factor Why the USA Became the World's Super Economy? Banking.

The Bank of North America came into being during the darkest years of the American Revolution. By 1781, Congress was nearly bankrupt, the Continental currency had collapsed in value, and the government lacked a reliable way to finance military operations. Robert Morris, the newly appointed Superintendent of Finance, proposed creating a national bank to stabilize public finances and support the war effort.

Morris drew heavily on ideas previously suggested by Alexander Hamilton, who had advocated for a national bank as early as 1780. Congress approved the plan on May 26, 1781, granting a federal charter to the Bank of North America, which opened in Philadelphia on January 7, 1782.

The bank failed to succeed as the nation's first central bank for many reasons, among them was a weak central government, then formed under the Articles of Confederation, resistance to the monopoly power a central bank would wield, and Pennsylvania not recognizing federal authority to form a bank. It subsequently revoked its charter and re-formed it as a private bank.

But it was successful in financing the Independence War, facilitate tax collection and government payments, and improve confidence in the new nation's emerging finance system. Hamilton would go on to form Bank of New York (America's oldest surviving bank), and support a subsequent national bank operating under the Constitution, the First Bank of the United States.

In his efforts he was opposed by many luminaries such as Thomas Jefferson and James Madison, who felt such a bank with monopoly power will infringe on states' rights. 

Today, most historians view Hamilton as the father of American finance. While the First Bank's charter expired in 1811, the concepts he championed, including federal debt management, national credit, central banking functions, and a strong financial infrastructure, heavily influenced later institutions such as the Second Bank of the United States and eventually the Federal Reserve System established in 1913. 

From Hamilton's wisdom, we have the highly decentralized banking system of today. One that is becoming more centralized as a result of consolidation, and centralized regulation that is interfering in the localized distribution of capital so important to our nation's growth.

How did banking make the United States an economic powerhouse?

Economists often describe finance as the mechanism that moves savings from households to productive investments.

Research shows that well-developed financial systems help identify promising firms, monitor borrowers, spread risk, and fund innovation. When capital reaches the most productive users, economic growth accelerates.

The United States, unlike France, England and Germany that relied on powerful central banks and crony capital allocation, became exceptionally good at this process. What were some of its features?

1. It was unusually decentralized

For much of American history, the United States had thousands of independent banks rather than a few large national banks.

Unlike Britain, France, or Germany, banking developed through a highly federalized system where states often regulated banks separately. This created intense competition but also fragmentation. Economic historians argue that the structure of American banking reflected political choices that distributed financial power broadly rather than concentrating it in a handful of institutions.

2. It combined banks with exceptionally deep capital markets

One of the most distinctive features of the U.S. system was that firms could obtain financing from both:

• banks,
• bond markets,
• stock markets,
• venture investors,
• private equity investors.

Research shows that financial development promotes growth because it lowers the cost of external financing and allows firms with productive opportunities to obtain capital more easily.

American entrepreneurs were often able to raise money even when they lacked family wealth.

3. It evolved toward greater interstate integration

For much of the twentieth century, many states restricted branch banking. When those restrictions were gradually removed, banks became better at allocating capital across regions.

A peer-reviewed study found that states experienced faster growth in income and output after branch banking deregulation. Importantly, the improvement came primarily from better lending decisions, not simply more lending.

This finding is critical because it suggests that economic growth came from directing capital toward more productive businesses.

Did banking alone contribute to the US becoming an economic superpower? No. 

But we became who we are partly because our financial system became exceptionally effective at allocating capital to productive and innovative uses. Growth was driven less by the sheer quantity of lending and more by the financial system's ability to identify, fund, and monitor high-return investments. A system that requires a local decision maker to finance a Montana ranch, a nearby entrepreneur, or allow a local company to scale. 

Our banking system is remarkably close to Alexander Hamilton's original vision: a financial system that could mobilize savings, create credit, and direct capital toward national economic development.

It has allocated capital effectively during our 250-year existence. It's worth perpetuating.

~ Jeff

Community Bank History: Peoples National Bank, Hallstead, Pennsylvania

Community banks tout themselves as better than national and regional banks because of how close they are to their communities. Pundits, including myself, have been critical that our industry has moved away from this model in pursuit of growth to many communities, where they end up being another bank IN the community, rather than THE bank of the community.

But this opinion ignores the generations of history many banks across our great land have built. A case in point: the First National Bank of Hallstead… now Peoples National Bank (see photo).

When the bank opened in 1905, Hallstead was already a thriving community. It was a northbound terminus of the Delaware, Lackawanna and Western Railroad (DL&W) used to move coal northward that was being mined in Lackawanna and Luzerne Counties. Hallstead bustled with manufacturing, a lively tourist trade drawn by the natural beauty of the area on the banks of the Susquehanna River, and a full complement of small businesses to serve the needs of the town and surrounding rural communities. Prior to the bank’s founding, townspeople and businesses turned to the north, Binghamton, for their banking needs.

After six months in business, the bank posted profits of $750*. The town and the bank continued to grow. The bank showed deposits of $596,589 prior to the stock market crash of 1929 (approximately $10 million in today’s dollars). In 1933, as a result of the depression, deposits had fallen to $393,299 where they remained for most of the depression. The bank closed during the national bank holiday that was ordered by President Roosevelt in 1933. However, they proudly reopened after examiners audited the books and pronounced them safe and sound. Reportedly, the First National Bank of Hallstead was the first in the country allowed to open for business.

And so it went in Hallstead, growing gradually, as towns tended to do in rural Pennsylvania, with bank loans funded by local depositors supporting the growth. In 1965, the First National Bank of Hallstead merged with nearby Hop Bottom National Bank to form today’s Peoples National Bank.

One hundred years ago, much of the region the bank served was like the nation as a whole outside of metropolitan areas: rural, agrarian, with limited manufacturing. Over the course of the bank’s history, that has changed remarkably. Small farms gave way to manufacturing which, in turn, gave way to service industries.

During Peoples National Bank’s recent past, hallmark local businesses have either gone away or significantly downsized. But the communities the Bank serves continue to be resilient. Today, renewal may come in the form of what is under the ground, rather than above it, similar to the salad days of the anthracite coal industry. Much of the Marcellus Shale formation runs through the bank’s markets, and interest from those wishing to harvest the natural gas that lies beneath is creating pockets of newfound wealth.

Throughout the economic ups and downs that have befallen the national and local economies, Peoples National Bank and its predecessor banks the First National Bank of Hallstead and Hop Bottom National Bank have endured and helped their communities endure. In 2009, despite the most significant banking crisis since the Great Depression, Peoples National Bank's parent company sported a 1.07% return on average assets and a 12.62% return on average equity.

Their history, similar to the histories of hundreds, if not thousands, of community banks across our landscape, is our history. They helped our communities thrive, deal with tough times, and thrive again. They take deposits from us and our neighbors, and lend it to us and our neighbors. They were critical to the start of many businesses in our communities that now employ us. Banks like Peoples National Bank employ me and my firm, and I am proud to be part of this industry.

- Jeff

To my community banking (thrifts and credit unions too) brethren: Occasionally I would like to highlight the history of a community bank and how it made a difference in the evolution of the communties it serves. If you have stories similar to the above, please let me know. I think it is important as our industry goes through tremendous changes that pull us away from our communities and towards mass commoditization, to step back and recognize what made us unique in the first place.

*Many of the facts in this post came from Peoples National Bank 100 Year Anniversary booklet, published in 2005.

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. I have a tough enough time making investment decisions on my own.