When they were created, courts in the several colonies that eventually became the United States adopted judicial precedents of English common law. U.S. constitutional and statutory law, however, is based on a fundamentally different concept of government. Under the English constitutional model, kings (and later parliaments) hold absolute authority, tempered by common-law principles of interpretation and a rather muddled early Anglo-Saxon concept of voting rights whereby the people (through representatives) elect kings as the need arises.

European feudal law, with its foundations in the civil codes of ancient Rome (adopted in France and through Charlemagne’s Holy Roman Empire), was introduced into English law when William the Conqueror invaded the British Isles and seized control in 1066. While he sought to ensure his own family’s succession to the British throne, William also embraced the Anglo-Saxon approach of electing officials as the means by which he could free himself from obligations owed under feudal law to the Norman lords who helped him conquer England. The interplay created by this bifurcated thinking generated constitutional debates in England that make for an entertaining and wonderful history, but one far too long and complex to repeat here.

The principle of rule by vote of the people of England was finally and firmly established when William III became king at the conclusion of the Glorious Revolution in 1688. The comparative voting powers of lords and commoners continued to evolve, but rule by the people prevailed.

At its inception in 1789, the United States created a new concept from that outcome of England’s constitutional debates. Under the U.S. Constitution, we are a nation of sovereign states. Each state and the federal government directly and indirectly derive all powers solely from the people. The U.S. Constitution includes (1) powers granted by the people that the government of the United States can exercise unless a supermajority of the people change the document, (2) rights the people have that cannot be denied without a supermajority vote, and (3) a declaration that the states get what’s left.

From the beginning there was debate in the United States about the meaning of the terms within each category. That debate will continue as long as the nation survives. Americans have amended the Constitution only 27 times, and 9 of those alterations relate to election procedures and timing, and other voting matters.

Within the listed powers of the federal government, a bifurcated elected Congress holds all legislative authority. A president, elected by a deliberately obscure and oft-changed electoral college process with origins in the Anglo-Saxon approach William I found useful after 1066, holds the nation’s executive powers. The Constitution offers little definition, however, of what executive power means. The judiciary is headed by judges who hold guaranteed life appointments with no reduction in pay—a system that remains unique in the world.

The United States has come to recognize its judiciary as the arbiters of when government can and cannot exercise power. That is important to finance because debt only has value to the extent that people can enforce its repayment in courts. Under the Constitution, only Congress can enact bankruptcy laws with uniform application throughout the nation. The United States is both a tariff-free trade area, wherein Congress ultimately determines rules of interstate trade, and a monetary union. Only Congress can authorize that U.S. currency be issued and U.S. debt incurred.

For better or worse, therefore, debt and its value in U.S. commerce are largely functions of federal law. While maddening for writers, businessmen, economists, accountants, and financiers, it is a good thing that Americans have proven to be a litigious people. The result is thousands of cases and opinions, many by the U.S. Supreme Court, that define rights relating to finance and the trading of financial instruments. That body of law is truly incomparable.

Finance during the period before the American Revolutionary War reflected a tumult of shifting issues mirroring the civil war in England and economic problems encountered during the first century of British experiments with a central bank. When the Bank of England got a cold, American colonists suffered pneumonia, and more emigrants arrived in the colonies whenever economic prospects in Britain (or in continental Europe) deteriorated.

It is an axiom of finance that the sale of a note or draft is economically identical to creating a loan secured by the note or draft. Rather than borrow at high rates from the king’s banks, therefore, Colonial merchants tried to finance trade by exchanging bills of lading and the like among themselves. The British government imposed stamp taxes on such exchanges. The tax could be viewed as replacing the interest British banks would otherwise have received on loans, achieving the same result. Southern landowners in need of cash for operations mortgaged land to the monopoly of British banks and suffered along with Adam Smith’s friends when the king’s follies forced the Bank of England to raise loan rates

As Adam Smith showed, colonialism became a fool’s game on both sides of the Atlantic. The United States would have been better off on its own (and better for Britain as a trading partner) than as a bunch of unruly colonies. It took time, but U.S. backing of the United Kingdom in World Wars I and II finally settled (or should have settled) arguments over whether England should have continued to oppress and fight its former American colonies. Indeed, between World Wars I and II the United States and Britain literally changed places, with the global hegemon of the nineteenth century becoming dependent upon its former colonies for economic and military support in the twentieth century.

The model of the U.S. Constitution of government by one sovereign state over an amalgam of separate state sovereigns remains the world’s only long-proven method of achieving that goal in a balanced manner that respects shared rights of sovereignty and individual freedom. Try as we may, however, the United States has still not resolved the problem of sustained financial stability. Indeed, the ebb and flow of economic fortunes seems to be one of the unfortunate attributes of a free society where fraud and righteousness exist side by side.

Many of the first constitutional arguments over the relationship between the states and the U.S. government involved banking. Courts had to decide if silence on the issue of creating a bank allowed the federal government to organize one. The answer to that was yes, because it was deemed appropriate and helpful to the power to regulate interstate commerce and international trade (among other things).

Next, if a federal bank decided to speculate in a manner that disrupted established state banks, could a state protect its own banks by restraining a federally chartered bank? The answer to that was no. If the federal government exercises its power to establish and regulate a bank, states cannot interfere with that exercise of federal supremacy under the U.S. Constitution.

It remained, however, a political question whether federal powers of banking would or would not be exercised. Experiments with versions of the British central bank model led the United States to twice eliminate a central bank. Experience with so-called wildcat banks in the 1800s, however, proved disastrous. They raised fortunes and then ruined many businesses. The United States came to learn that neither the British central bank model nor an entirely free banking model could solve problems with speculative fraud and the demise of wealth generated by bank failures.

During the Civil War, Lincoln discovered that state-chartered banks were only willing to lend to the Union at market rates (which the bankers set high) for war funding. Rather than refighting the central-bank battle a third time, Lincoln convinced Congress to create the system of private national banks (which were chartered in Washington, DC, but owned and operated throughout the nation) that endures today.

Some argue that the Union’s success in the Civil War arose as much from superior finance as from more and better manufacturing processes. With the creation of national banks to support the financial needs of the Union, Lincoln gained access to depositors who had previously funded state-chartered banks. He also issued massive amounts of paper currency—greenbacks—to further increase the pool of liquidity to finance the conflict. State banks, which at first had opposed the war, soon found greater merit in accommodating the nation’s war needs. The relative cost of funding the war fell, and the United States has operated a dual charter (state and federal) banking model ever since.

Dual bank chartering has, at times, led to competition over which authority will provide the least regulation. At other times each group has correctly noted defects in the other’s regulations and generated better governance.

Before 1933, when the Federal Deposit Insurance Corporation (FDIC) became the insurer of U.S. bank deposits and the designated receiver of failed insured banks, another form of legal competition greatly informed the history of U.S. banking. That unfortunate competition occurred via litigation between receivers of banks driven to insolvency by managers’ speculations and borrowers to whom managers chose to loan the bank’s money.

Perhaps by virtue of the balance of funds available for such suits, lawyers representing bank receivers convinced the courts (both state and federal) that appointed their clients that receivers were entitled to exercise remarkable powers when seeking to collect money needed to repay an insolvent bank’s innocent depositors. Case law from the nineteenth century deemed banks “instruments of monetary policy” for the governments that chartered them, in part because all currency in the United States at the time was issued by private banks. Bank receivers, therefore, can still collect bank assets, such as loans, free from any defense arising by actions of the defunct bank—unless those actions are set forth in duly enacted written bank records approved by the bank’s directors.

In a famous 1942 U.S. Supreme Court case relying on those precedents, a note guarantor offered proof that he had, in fact, paid the guaranteed loan before receivership occurred. Since he failed to take possession (or cause cancellation) of the note he guaranteed, however, the receiver was allowed to collect on the guaranty. Because the accuracy of the bank’s records with respect to the loan was the guarantor’s responsibility, as opposed to the receiver representing “innocent depositors,” the guarantor had to pay twice for the same debt.

Thus, none of the normal defenses against repayment that borrowers assert when a bank seeks collection are available against a receiver if the bank goes bust. To this day, when the FDIC considers hiring attorneys to advise bank receivers, the first (and sometimes only) question relates to that 1942 case and whether the attorney really understands what it means.

If the prospective attorney fails to see the ironic humor in receivers’ rights, he or she may not gain appointment from the FDIC. By the time they go broke, large banks often face hundreds of lender liability claims asserted to delay payment by defaulting borrowers. The cases occupy a large share of senior management’s time and generate huge legal bills. When a receiver is appointed, however, these claims are all generally dismissed on the basis of a standard motion and a brief the FDIC provides to the receiver’s counsel.

Before getting to the post–Civil War legal and economic matters that gave the United States robber barons, reenslavement by outrageous abuses of legal process, and periodic financial crises that ultimately led the United States to create the Federal Reserve System and the FDIC, let’s first return to London in 1866.