Winners and Losers in Finance: The Second Bank and the "Shadow Banking System"

Jane Knodell

One of the biggest “losers” in nineteenth century US economic history was the Second Bank of the United States (1816-1836). The demise of the Bank fostered the growth of what would today be called the “shadow banking system”, particularly in those financial markets and regions where the Bank had had a dominant presence. Among the “winners” of the decision to close the Second Bank were members of the “shadow banking system”, unincorporated firms dealing in a varying mix of monetary and financial assets.

The BUS saw itself as saving the country from the excess earnings that such financial businesses would have enjoyed, had it not been for the Bank. I show how the Bank used its branch network to undercut potential competitors in three money markets: the market for domestic bills of exchange, the market for foreign bills of exchange, and the market for specie (silver and gold coin). The Bank itself functioned as an interregional dealer in these markets, and made profits from bridging intercity differences in the supply of and demand for various monetary assets. Its national branch network, directed and coordinated from Philadelphia, made it both a powerful competitor and a price-stabilizer in these markets, limiting the scope of market-based banking.

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