Nature of the Reports
The 350 Golembe Reports produced over the past 35 years constitute a significant, and unique, storehouse of information on the interplay between U.S. banking and government during, roughly, the half century following the end of World War II. The reports were never intended to provide just description of banking events, such as might be obtained from a newspaper file. Instead, with relatively few exceptions, each report deals with a single subject of importance to banking, which subject at the same time has an equally important public policy dimension. If the subject dealt with was, say, capital regulation or perhaps the emergence of bank holding companies, it is likely that it would have been revisited often in later reports, until the issues posed were no longer important. Deposit interest regulation is a good example of the latter.
A notable feature of many Golembe Reports was the attention given to the historic underpinnings of the problems or issues analyzed. After all, banking in the United States emerged full-blown with independence, without having behind it the kind evolutionary history typical of other nations. The problem of financing the economic development of a new continent was immense, but just how it was to be done, and by whom, were political issues that resulted in vigorous, often bitter, debate. The usefulness and, indeed, even the legality of the banking business divided the nation’s major political parties in the early 1800s. As late as 1852 there were seven states (of the 31 then in existence) in which there were no incorporated banks in regular or active operation, primarily because of constitutional prohibitions of banking in those states.
We are now able to see that the foundation of the present banking system was put in place between 1830 and 1840. In that decade, the nation’s embryo central bank (The Second Bank of the United States) was destroyed by President Andrew Jackson because of its alleged excessive power over other banks and over the economy as a whole. Central banking was not to reappear in the United States for 77 years, until the Federal Reserve was established in 1913, and consisted of 12 Banks rather than one. In the same decade of the 1830s, and as a direct outgrowth of the “bank war” between Jackson and the Second Bank, New York State settled the question of who should have the right to obtain a bank charter by the enactment of its “Free Banking Act” in 1838. The answer was: everyone. The idea that any respectable group of citizens was entitled to apply for a bank charter quickly swept the nation, culminating in the decision by the federal government in 1863 to adopt its own free banking act, which shortly was titled the National Bank Act.
Free banking introduced three important elements to U.S. banking, all of which are still present. Taken together, they have created a banking system and structure unique among nations. First, it nailed down the fact that banking would be done largely by private persons in a very large number of independent banks, the number of banks being determined primarily by market forces rather than government edict. Second, banking would be supervised and regulated by paid employees of government, a novel idea (in fact, an idea often strongly opposed during the first 50 years of American banking) because of a general understanding that the federal and state governments could examine banks only if they had an ownership interest. Third, recognizing the fact that virtually free entry into banking would give rise to a greater number of bank failures than in a tightly controlled system with few banks, plans were adopted, from the very outset, to protect depositors (or holders of bank currency in early years) against loss due to bank failure. It is not often realized that the U.S. -- and only the U.S. -– had for 100 years, beginning in the 1830s, an unbroken history of state and federal efforts to protect creditors of failed banks. Some of these efforts were quite successful, while others were not. The search for an answer culminated finally in the establishment of federal deposit insurance in 1933. Free banking was responsible for making it possible for privately owned and operated banks to do business consistent with public policy objectives devised by government and supported by banking.
It is important that we take this time to emphasize and explain the difference between newsletters about banking and The Golembe Reports. Our reports are analytical and draw heavily upon banking history where relevant. They have long been regarded as authoritative, perhaps explaining their popularity in banking schools. They reached conclusions that were sometimes at odds with mainstream thinking or conventional wisdom. We mention this not to suggest that ours were the only correct conclusions but simply to emphasize that they were arrived at independently.