How We Got Here

A Brief History of America’s Banking System, and Why This Story Matters

Our financial system didn’t appear overnight. It formed through political choices, institutional experiments, and crisis responses—and it helps explain why today’s conditions are structural, not temporary.

Our current financial system did not appear overnight. It is the product of more than 150 years of political choices, institutional experiments, and economic crises. David Stockman’s recent essay, How We Got Here, traces that history with an unmistakable conclusion: America’s banking system has shifted from a relatively disciplined model to one dominated by central bank activism, debt monetization, and speculation.

As investors and citizens, we should understand how these changes unfolded—and what they mean for today’s economy.

The Early Years: From State Banks to National Banks

Before the Civil War, America’s financial landscape was fragmented. State-chartered banks issued their own notes, and banking remained local. The National Banking Acts of 1863 and 1864 transformed that structure, requiring banks to hold U.S. Treasury bonds as backing for their notes.

This move solved fiscal problems for Washington but created a “pyramid” reserve system—small banks relied on larger ones, which in turn leaned on central reserve city banks. Stockman argues that this arrangement was inherently fragile. Panics and liquidity crunches were common, but, in his view, these disruptions were brief and did not derail long-term growth.

The lesson: The seeds of fiscal dependence were planted early.

The Creation of the Federal Reserve in 1913

When the Federal Reserve Act was passed, its mission was far narrower than the activist role we see today. The Fed was designed to be a “bankers’ bank”—a liquidity backstop to smooth seasonal money flows and to stabilize the banking pyramid.

Importantly, it was not tasked with managing GDP, employment, or stock prices. For decades, the gold standard still constrained its reach. Only later would the Fed expand into the powerful macroeconomic manager we know now.

The Postwar “Golden Age”

A turning point came with the 1951 Treasury-Fed Accord, which freed the Fed from pegging interest rates to finance government debt. What followed, Stockman argues, was a golden age: from the 1950s into the mid-1960s, the Fed’s balance sheet barely grew, yet the economy expanded rapidly.

This period is used as proof that robust growth does not require constant monetary tinkering. In Stockman’s telling, restraint worked—and worked well.

From Discipline to Activism

The real break came in the 1970s. The end of dollar convertibility to gold in 1971 removed the last hard anchor. Inflation, political pressures, and global turbulence pushed the Fed into a new role: activist, interventionist, and increasingly political.

Over the following decades, the central bank moved beyond being a liquidity provider to become a manager of asset prices, debt markets, and even fiscal deficits. From the Greenspan “put,” to 2008’s massive interventions, to the trillions created during COVID, the pattern was set.

Today, the Fed’s balance sheet towers at levels unimaginable in its early decades—while debt, speculation, and financial fragility have grown alongside it.

Lessons and Warnings

• Debt and monetization feed each other: deficits demand issuance; the Fed buys, enabling more deficits.
• Speculation thrives on cheap credit: low rates fuel bubbles and financial engineering over productivity.
• Intervention creates fragility: moral hazard grows; each rescue plants seeds of the next crisis.
• Growth can happen without activism: disciplined central banking can coexist with strong growth.

Where Do We Go From Here?

Stockman’s history is not just about the past. It is a warning about the present. A system built on endless debt and central-bank activism cannot remain stable forever. For investors, that reality underscores preparation—diversification, real assets, and strategies that assume volatility, not stability.

A practical question worth asking:

Is your plan built for “normal” — or built for an era where volatility is the baseline?

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Educational commentary only. Investing involves risk, and no strategy can guarantee outcomes.

We did not arrive at today’s fragile financial system by accident. It was built step by step, through policy choices that gradually transformed banking from a disciplined reserve system into a debt-fueled machine.

Understanding that journey helps us make sense of where we are—and why the risks ahead may be greater than most are willing to admit.