A banking system provides financial intermediation, taking deposits from individuals and households with excess cash balances and making LOANS to individuals and businesses wishing to borrow funds for CONSUMPTION or INVESTMENT. Banks also provide safekeeping for depositors’ liquid ASSETS. Historically, banking systems evolved from early goldsmiths and silversmiths who provided depository and safekeeping services for merchants and traders. Metalsmiths often charged a fee for storing MONEY and issued a receipt to depositors. These receipts were often exchanged in commerce, becoming currency. Over time the receipts became standardized with respect to value, creating the first paper currency. Recipients could redeem them for gold or silver, but frequently held and used the receipts to make their purchases. Metalsmiths, observing that not all receipts were redeemed during any time period, realized they could issue more receipts than the amount of gold or silver they had in their vaults. They could, in effect, create money. Money is anything people will accept as a means of payment. Since merchants and consumers had always been able to redeem these receipts for precious metals, they became accepted as money. Metalsmiths began making loans in the form of receipts to traders, accepting a note promising to repay the loan with interest, usually on completion of the trading venture. In the process, metalsmiths were engaging in fractional reserve banking, maintaining less gold or silver in their vaults than the exchange value of the receipts outstanding. Today banking systems, as early metalsmiths did, create money through fractional reserve banking. Of course, there is the danger that depositors will all demand their money back at the same time. During the GREAT DEPRESSION there were many “runs” on banks, causing over 9,000 banks (more than 40 percent of the banks in the country) to fail during the period from 1930 to 1933. Because of the risks involved, banking systems in any country are regulated. The first American bank was the Bank of North America, established in Philadelphia in 1782. The bank issued banknotes, convertible into gold or silver coins. Soon commercial banks were established in all major colonial cities, and the early American banks were controversial. Merchants and traders supported their creation as a means of access to credit (previously secured through British sources), but farmers perceived banking as a nonproductive activity and a source of INFLATION in the economy. Also, many colonists had come to North America to escape from their previous experiences with creditors and debtor prisons in Europe. At the end of the American Revolution, part of the federalist/ antifederalist debate concerned the development and control of banking. Federalists won the debate, resulting in the creation of the first central bank, the Bank of the United States, in 1791. Charged to regulate the MONEY SUPPLY in the public’s best interests, the Bank of the United States operated both as a commercial bank and as a central bank. Like commercial banks, it took deposits, made loans, and issued banknotes, but it also controlled the amount of banknotes (money) state banks could issue and acted as the banking agent for the federal government. When its officials thought a state bank was extending too much credit, the bank would accumulate a large amount of the state bank’s notes and present them for redemption. This decreased that bank’s precious metal reserves, forcing the bank to reduce its lending activity or face bank failure. Antifederalists decried this policy, and in 1811 Congress failed to renew the charter of the Bank of the United States. After a period of inflation, Congress established the Second Bank of the United States during the War of 1812. It operated as the central bank until President Andrew Jackson set out to destroy it, and after a protracted period known as the Bank War, the Second Bank’s charter was not renewed in 1836. From this time until the establishment of the Federal Reserve in 1913, the U.S. banking system operated without a central bank. State chartered banks expanded during the period after 1836, but not without problems. Politics and corruption allowed state banks to operate without regulatory supervision, resulting in numerous bank failures and widespread distribution of banknotes of questionable worth; one publication, The Bank Note Reporter and Counterfeit Detector, reported the existence of over 1,000 counterfeit banknotes. In addition to counterfeiting problems, without a central bank the money supply varied widely, contributing to inflation and bank panics. States and regions attempted a variety of remedies, including bank reserves holding agreements, bank holdings of state BONDS, and state deposit insurance, but problems persisted. The federal government’s need to finance the Civil War resulted in the creation of a national banking system (the National Bank Act of 1862). (Readers who have seen the classic Civil War film Gone With the Wind may recall the South also created their own banking system. Ashley Wilkes patriotically exchanged his gold and silver assets for confederate currency, but Rhett Butler shrewdly held his precious metals.) National banks were required to purchase bonds issued by the federal government, generating needed resources for the war effort. National banknotes printed by the U.S. Treasury were redeemable at any national bank. In addition to establishing nationally chartered banks and a common currency, the National Bank Act established CAPITAL requirements, placed restrictions on the type and amount of loans that could be made, set up minimum RESERVE REQUIREMENTS, and provided bank supervision by the COMPTROLLER OF THE CURRENCY. State banks continued to exist, but their banknotes were driven out of existence by the imposition of a 10-percent tax in 1865. In response, state banks replaced banknotes with checks written on bank deposits. As a result, the United States developed a dual banking system, with both state chartered and nationally chartered banks but, until 1913, no central bank. After a series of financial panics that culminated in the Panic of 1907, the FEDERAL RESERVE SYSTEM was created to act as the nation’s monetary authority, lender of last resort to banks facing liquidity problems, manager of a bank payment system, and supervisor of bank operations. Even with the creation of the Federal Reserve, the U.S. banking system continued to have problems, resulting in the creation of the Federal Deposit Insurance Corporation in 1934 and similar deposit insurance protection for other nonbank FINANCIAL INTERMEDIARIES. Historically (much less so today), commercial banks made loans to businesses but not to households. This left a need for other financial intermediaries, leading to the creation of mutual savings banks, SAVINGS AND LOAN ASSOCIATIONS, CREDIT UNIONs, and finance companies, all of which provide home MORTGAGEs and consumer credit loans.