The History of American Banking

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The History of American Banking
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1791-1837 The First and Second Bank of the
United States
Federalists It is needed to promote healthy
trade and business Prevent bad banks/fraud Issue
representative money
Anti-federalists Tool of the rich Only those
with money and status will get loans
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1837-1863 Free Banking Era

• After Jacksons Veto
• State Chartered Banks
• Fraud
• Bank runs
• Panics
• Many different currencies

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Civil War Era

• Union needed money for war effort
• 1861 Greenbacks
• First paper currency
• First use of Fiat Money - inflation

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1863-1913 National Banking Acts

• Gave the federal government power to
• Charter banks
• Require banks to hold adequate gold/silver
  reserves
• To issue a single national currency

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Gold Standard

• Enacted in 1900
• Wanted to create a standard unit of account to
  facilitate international trade
• As a result of the costs of World War and the
  Treaty of Versailles...by the 1920s countries
  abandoned Gold Standard

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1913 Federal Reserve System

• Glass-Owen Bill
• 12 Regional Banks
• Federal Reserve Board (7 members)
• Chairman of the Board Ben Bernanke
• Provide short term loans to member banks
• National Currency Federal Reserve Notes

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Fiat Money

• Money decreed to be of value from a government
• Many governments still use gold reserves as a
  defense of their currency
• Value of US dollar connected to value of Gold
• Weak dollar high gold prices

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Evolution of Money
Type of Money Examples Advantages Disadvantages
Commodity Have value other than currency Standard of value Medium of exchange
Legal Tender a medium of payment allowed by law  Store of value
Paper receipts Bills of exchange Merchant exchange Fractional reserve banking
Transaction accounts Fractional reserve banking Checking accounts Debit cards Fluidity in the market place
?? CREDIT, RISK, FRAUD
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The Great Depression

• Bank loans high risk
• Default on loans
• Market Crash
• Bank Runs
• New Deal
• Federal Deposit Insurance Corporation FDIC
• Banks closely regulated

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1970s 1980s Deregulation

• Series of Acts to Deregulate Banking Industry
• Bank mergers
• Banks sell stocks and bonds

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2007-2008 The Great Recession

• How would you characterize this period?

Bank Failures Volatile stock market Fraudulent
Accounts Overextension of Credit Default
mortgages Accounting Practices
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What Next???