19th Century – Civil War
Investment banking has been around since the start of the 19th century. To put that in perspective, Napoleon was still winning wars, and Ohio just became the 17th state. Private banks were offering investment-banking functions during this time and up until the Civil War. In the 1860’s, Jay Cooke started the largest securities selling operation the United States had ever seen. He amassed more than $1.5 billion dollars in war bonds for the U.S. treasury, supplying much needed capital to the Union Army.
The period after the Civil War was tumultuous for the financial market. In older established countries such as Great Britain, capital could be sourced from a vast number of international banks. The United States, on the other hand, was growing rapidly but had no such resources. Investment banks emerged to connect investors with capital and firms who needed that capital during the time of western expansion. Large amounts of capital were needed to fund heavy industry, mining companies, and railroads, such as the Union Pacific and the Central Pacific.
The Great Depression
Skipping ahead to the 1930’s, The Great Depression had taken hold of the nation, and President Roosevelt was in office. The banking system in the United States had collapsed and all functions had ceased. Roosevelt had constructed the New Deal, a series of laws and executive orders designed to provide relief, recovery, and reform to the ravaged U.S. A huge portion of the New Deal was concerned with the banking system. The Glass-Steagall Act of 1933 formally separated banks by function, either commercial or investment banks. Unlike traditional commercial banks, they could no longer accept deposits or issue notes. They would serve as intermediaries or brokers.
Post Depression- Present
After the era of the New Deal, investment banks shifted their focus to advising on mergers and acquisitions and public offerings of securities, such as stocks. The Glass-Steagall Act of 1933 was repealed in 1999 and removed the separation between investment and deposit banking. This move directly contributed to the financial crisis of 2007. This is sometimes called the Great Recession or the Global Financial Crisis. It was the worst financial disaster since the Great Depression. There is currently reform and change going on regarding the banking system.
Regardless of the banking highs and lows, investment banking changed the American landscape. It turned the tides of the Civil War, and Western expansion would have been deterred without it. It facilitates capitalism in America and is a pillar of modern banking. Lending money and making money – it’s all a part of the American dream.