Our government’s earliest leaders struggled over the shape of our banking system. They knew that banks have considerable financial power. Should this power be concentrated in a few institutions, they asked, or shared by many? Alexander Hamilton argued strongly for one central bank; that idea horrified Thomas Jefferson, who believed that local control was the only way to restrain banks from becoming financial monsters.
We’ve tried both ways, and our current system seems to be a compromise. It allows for a multitude of banks, both large and small. Both federal and state governments issue bank charters for “public need and convenience,” and regulate banks to ensure that they meet those needs. The Federal Reserve controls the money supply at a national level; the nation’s 10,715 banks control the flow of money in their respective communities.
Because banks hold government-issue charters and generally belong to the federal Bank Insurance Fund, state and federal governments use banks as instruments of broad financial policy, beyond money supply. Governments encourage or require different types of lending; for instance, they enforce nondiscrimination policies by requiring equal opportunity lending. They promote economic development by requiring lending or investment in banks’ local communities, and by deciding where to issue new bank charters. Using banks as tools of economic policy requires a constant balancing of banks’ needs against the needs of the community. Banks must be profitable to stay in business, and a failed bank doesn’t meet anyone’s needs.