The US Payment Systems

The US payments systems are the largest and most varied in the world: highest volumes, largest number of participants (over 17,000 commercial banks, savings institutions and credit unions in 2007) and a variety of instruments and settlement mechanisms. We should remember that the US had no central bank until the early twentieth century when the Federal Reserve was created. A central bank had been created with a 20 year mandate after independence in 1796. Its mandate as Second State Bank was renewed for a further 20 years but a second renewal, although approved by Congress, was vetoed in 1836 by President Andrew Jackson. The debate raged between the supporters of central banking and free banking, as part of the wider argument between federalism and anti-federalism, the Hamilton/Jefferson conflict and the populist contempt of banks. Monetary policy was devolved to the state Reserve Banks, leading to differences in policies and interest rates and opening opportunities for arbitrage. The cheque clearing houses operated with one of the participants acting as a settlement institution, moving funds between accounts held with it by the other banks. One of the reasons behind the Federal Reserve Act by Congress, which created the Federal Reserve System on 23 December 1913 as a‘Christmas gift to the nation’, was disruptions in payments as many banks and local clearing houses refused to accept cheques drawn on certain institutions following The Bankers’ Panic in 1907.