United States Financial History
Authors: Chapin Christy Ford 
Published: March 2021

The history of US finance—spanning from the republic’s founding through the 2007–2008 financial crisis—exhibits two primary themes. The first theme is that Americans have frequently expressed suspicion of financiers and bankers. This abiding distrust has generated ferocious political debates through which voters either have opposed government policies that empower financial interests or have advocated proposals to steer financial institutions toward serving the public.

A second, related theme that emerges from this history is that government policy—both state and federal—has shaped and reshaped financial markets. This feature follows the pattern of American capitalism, which rather than appearing as laissez-faire market competition, instead materializes as interactions between government and private enterprise structuring each economic sector in a distinctive manner. International comparison illustrates this premise. Because state and federal policies produced a highly splintered commercial banking sector that discouraged the development of large, consolidated banks, American big business has frequently had to rely on securities financing. This shareholder model creates a different corporate form than a commercial-bank model. In Germany, for example, large banks often provide firms with financing as well as business consulting and management strategy services. In this commercial-bank model, German business executives cede some autonomy to bankers but also have more ability to engage in long-term planning than do American executives who tend to cater to short-term stock market demands.

Under the banner of the public–private financial system two subthemes appear: fragmented institutional arrangements and welfare programming. Because of government policy, the United States, compared to other western nations, has an unusually fragmented financial system. Adding to this complexity, some of these institutions can be either state or federally chartered; meanwhile, the commercial banking sector has traditionally hosted thousands of banks, ranging from urban, money-center institutions to small unit banks. Space constraints exclude examination of numerous additional organizations, such as venture capital firms, hedge funds, securities brokers, mutual funds, real estate investment trusts, and mortgage brokers. The US regulatory framework reflects this fragmentation, as a bevy of federal and state agencies supervise the financial sector. Since policymakers passed deregulatory measures during the 1980s and 1990s, the sector has moved toward consolidation and universal banking, which permits a large assortment of financial services to coexist under one institutional umbrella. Nevertheless, the US financial sector continues to be more fragmented than other industrialized countries.

The public–private financial system has also delivered many government benefits, revealing that the American welfare state is perhaps more robust than scholars often claim. Welfare programming through financial policy tends be “hidden,” frequently because significant portions of benefits provision reside “off the books,” either as government-sponsored enterprises that are nominally private or as government guarantees in the place of direct spending. Yet these programs have heavily affected both their beneficiaries and the nation’s economy. The government, for example, has directed significant resources toward the construction and maintenance of a massive farm credit system. Moreover, policymakers established mortgage insurance and residential financing programs, creating an economy and consumer culture that revolve around home ownership. While both agricultural and mortgage programs have helped low-income beneficiaries, they have dispensed more aid to middle-class and corporate recipients. These programs, along with the institutional configuration of the banking and credit system, demonstrate just how important US financial policy has been to the nation’s unfolding history.