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Two Views of Banking
The Federalists believed that a centralized banking system was necessary for the United States to develop healthy industries and trade. Alexander Hamilton proposed a national bank that could issue a single currency for the entire nation, manage the federal government's funds, and monitor other banks throughout the country. The Antifederalists supported a decentralized banking system. In this system, the states would establish and regulate all banks within their borders. -
First Bank of the US
Congress set up the Bank of the United States, granting it a twenty-year charter. The bank was used:
-To hold money that the government collected in taxes
-To help the government carry out its powers to tax, borrow money in the public interest, and regulate interstate and foreign commerce
-To issue representative money in the form of bank notes, which were backed by gold and silver
-To ensure that state-chartered banks held sufficient gold and silver to exchange for bank notes -
Chaos in American Banking
Once the Bank's charter expired, state banks began issuing bank notes that they could not back with gold and silver coins. The states also chartered many banks without considering whether these banks would be stable and creditworthy. Without any kind of supervision or regulation, financial confusion resulted. -
Second Bank of the United States
To eliminate the financial chaos, Congress chartered the Second Bank of the United States. The second Bank was limited to a twenty-year charter. The Bank slowly managed to rebuild the public's confidence in a national banking system, although many people continued to oppose the idea. President Jackson's extreme distrust of the Second Bank led him to veto the renewal of the Bnak in 1832. -
Free Banking Era
The period between 1837 and 1863 is known as the Free Banking, or "Wildcat," Era. The number of state-chartered banks nearly tripled. State-chartered banks often did not keep enough gold and silver to back the paper money they issued. This set of bank runs: widespread panics where great numbers of people tried to redeem their paper money at once. A few banks engaged in out-and-out fraud. These banks were allowed to issue currency. Notes of the same denominations often had different values. -
Currency in the North & South
The United States Treasury issued its first paper currency since the Continental. The name of the currency was "demand notes," but they were called "greenbacks" because they were printed with green ink. In the South, the Confederacy issued currency backed by cotton, hoping that a Confederate victory would ensure the currency's value. -
Unifying American Banks
The federal government enacted reforms aimed at restoring confidence in paper currency. These reforms resulted in the National Banking Acts of 1863 and 1864. These acts gave the federal government:
1. the power to charter banks
2. the power to require banks to hold adequate gold & silver reserves to cover their bank notes
3. the power to issue a single national currency -
The Gold Standard
The nation adopted a gold standard, a monetary system in which paper money and coins are equal to the value of a certain amount of gold. It had 2 advantages:
1. It set a definite value for the dollar. Since the value was set, people knew that they could redeem the value of their paper money at any time.
2. The government could issue currency only if it had gold in the treasury to back the notes. The government was prevented from printing an unlimited number of notes. -
The Federal Reserve System
The Fed served as the nation's first true central bank, or bank that can lend to other banks in time of need. The system created up to twelve regional Federal Reserve Banks throughout the country. All of the Federal Reserve Banks were supervised by a Federal Reserve Board appointed by the President of the U.S. Each of the regional FRB's allowed member banks to borrow money to meet short-term demands. The system also created the national currency we used today-Federal Reserve notes. -
Banking & the Great Depression
During the 1920s, banks loaned large sums of money to many high-risk businesses. Many of these businesses proved unable to pay back their loans. The 1929 stock market crash resulted in widespread bank runs as nervous depositors rushed to withdraw their money. -
Banking Reforms
After Franklin Roosevelt became President, he acted to restore public confidence in the nation's banking system. On March 5, 1933, Roosevelt declared a national "bank holiday" and closed the nation's banks. The "bank holiday" was not a time of festivities, but a desperate last resort to restore trust in the nation's financial system. Later, Congress passed the act that established the Federal Deposit Insurance Corporation (FDIC). The FDIC insures customer deposits if a bank fails. -
The Savings & Loan Crisis
Deregulation was one cause of the S&L crisis. S&Ls had previously been protected by government regulation. S&Ls were unprepared for competition after deregulation. During the 70s, S&Ls had made long-term loans at low rates. By the 80s, interest rates had skyrocketed. This mean S&Ls had to pay out high interest rates to their depositors. A few financially important institutions fraudulently made large loans to businesses that had little chance of succeeding. -
Recent Trends
Congress repealed the 1933 Glass-Steagall Act. This action paved the way for banks to sell financial assets such as stocks and bonds while establishing new privacy rules for customer data. In addition, the 90s and 2000s saw a growing trend toward bank mergers.
