Commercial Banks and Underwriting Securities
Historically, banks in the US were relatively unregulated and control was exercised mainly by the states (Trescott, 1963). In contrast, in Europe and other developed lands, banking has been relatively centralized and controlled by the national government and/or was not a stable business, making big profits in boom times through speculation in land and industry, but often going bankrupt in recessions when "financial panics" force the calling in of loans because uneasy depositors wanted or needed to convert their savings into cash. The result invariably was a large contraction of the US money supply in the aggregate, which exacerbated any economic recession. Rural, small institutions, called "wildcat banks," were particularly subject to such "runs" by depositors, which often led to insolvency by such banks. Indeed, such financial panics occurred in the US in the 1830s, 1850s, 1870s, 1890s, and 1907, the latter leading to the creation of the Federal Reserve. While this was not the first attempt at federal regulation of banking in the US, it has been the most lasting and significant.
In the 1800s, banks could be involved in investments and loans for land, business, and similar ventures (Trescott, 1963). It was largely up to the individual states, and the result was the instability and cyclicality of the industry. Yet banks are a unique institution, affecting the nation's currency, which eventually was to force the federal government to exercise the stringent controls similarly implemented by European governments for centuries in some cases (for instance, Britain and Sweden). In the 1800s, American banks participated in often-speculative loans in railroads, mining, land, manufacturing, etc., mirroring the growth -- and stumbles -- of the US economy as a whole.
In the late nineteenth century, big-city banks began exercising the functions of both commercial and investment banks ...