Maxfield on Banks

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JOHN MAXFIELD'S MAGNUM OPUS ON BANKING - PART II

www.maxfieldonbanks.com

JOHN MAXFIELD'S MAGNUM OPUS ON BANKING - PART II

Fixing a flaw in the theory of banking.

John Maxfield
May 28, 2023
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JOHN MAXFIELD'S MAGNUM OPUS ON BANKING - PART II

www.maxfieldonbanks.com
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In the first part of this series, we talked about the peculiar dynamics that render banks uniquely prone to both committing error and suffering from the consequences.

We’ll focus now on the periodization of banking, the process of organizing a subject matter’s history into discrete blocks of time. A proper periodization catalyzes local understanding and knowledge, while a flawed one exerts an opposing effect.

Herein lies the reason, it seems, that so few people know the history of banking. For over a hundred years, we had been using a faulty map. The conventional periodization holds that the present era began in 1913, with the death of J. Pierpont Morgan and the enactment of the Federal Reserve Act.

This makes deceivingly intuitive sense. Prior to 1913, there was no lender of last resort in the United States. This deprived the government of a potent weapon to alleviate banking panics at the same time that it robbed banks of a means to tide over short-term disruptions in the credit markets. With the enactment of the Federal Reserve Act, that would all change.

Or so it seemed…

There’s just one problem…

Insofar as the data is concerned, nothing changed.

Bank Population

None of the seminal data sets in banking — mergers, failures, de novo formations — belied even the subtlest clue of being influenced by the Fed’s debut. The absence of effect was most pronounced on a chart of the U.S. bank population dating back to the beginning of the country.

You find that 1913 comes and goes without notice.

So does 1914. The train doesn’t even slow down for the station, it trundles by until the caboose snags a bag off a hook. That’s the extent of the influence.

Put another way, there was clearly a more fundamental force dictating the sequence of events in banking.

But what was it?

We explain below.

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