2
2.1
2.2
2.3
2.4
Slide 1
DEVELOPMENT
OF U.S. BANKING
Creation of a National Currency
Banking Before 1913
Banking in the Twentieth Century
The Federal Reserve System
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Lesson 2.1
CREATION OF A
NATIONAL CURRENCY
GOALS
Identify different types of currency
Explain how currency evolved through the
early days of the United States to what it is
today
Slide 2
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WHAT IS CURRENCY?
Money is a medium of exchange for people to
use to trade things of value.
Most people associate the word “currency” with
paper money.
Strictly speaking, currency is all media of
exchange circulating in a country.
Slide 3
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CLASSIFYING CURRENCY
Metallic currency—coins
Paper currency—paper money and credit
instruments
Government currency—money printed by the
government
Bank currency—bank notes issued against
reserves
Deposit currency—checks
Slide 4
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SHIFTING MEANINGS
Before World War I
Many countries had governments that did not issue
paper money. In these countries, paper currency
meant only notes issued by large banks.
In the United States, currency meant the money that
the government printed.
After the war
The idea of currency took on the broader sense used
today.
Slide 5
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COLONIAL CASH
Some British-type coins were minted on
American soil as early as the 1650s.
Foreign money was more common.
There was limited use of English pounds and
shillings.
The Spanish dollar called the real was the most
popular.
Slide 6
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CURRENCY IN THE UNITED STATES
 1792 Mint Act authorizes coins.
 1794 U.S. mint begins operation.
 1794–1830s Both foreign and U.S. coins in circulation.
 1863–1864 National Currency Act and National Banking
Act establish standards and tax state bank notes.
 1864–1913 Problems with money supply persist.
 1913 Federal Reserve Act establishes banking system
of today.
Slide 7
Copyright South-Western, a division of Thomson, Inc.
Lesson 2.2
BANKING BEFORE 1913
GOALS
Identify the reasons for the establishment
and expiration of both the first and second
Banks of the United States
Describe the continuing problems that led
to the Federal Reserve Act
Slide 8
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THE FIRST BANK OF THE UNITED STATES
Chartered in 1791
Privately held with the U.S. government owning
about 20%
Performed functions of a central bank
Charter expired in 1811
Slide 9
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THE SECOND BANK OF THE UNITED STATES
Chartered in 1816 for twenty years
Regulated credit and the money supply at the
expense of state banks
Was weakened by opposition from President
Andrew Jackson and the withdrawal of
government funds
Died when its charter expired in 1836
Slide 10
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STEPS TOWARD CENTRAL BANKING
State banks
Private banks
The Independent Treasury System
Slide 11
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THE NATIONAL BANKING ACT OF 1864
Enacted to stabilize the banking system
Established the office of the Comptroller of the
Currency to issue charters to national banks
Helped establish a national currency
Did not provide for ongoing monitoring and
regulation of the credit and money supply
Did not guarantee the safety of banks
Slide 12
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Lesson 2.3
BANKING IN THE
TWENTIETH CENTURY
GOALS
Explain why Congress established the
Federal Reserve System
Identify challenges that the banking
system of the United States faced in the
twentieth century
Slide 13
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THE FEDERAL RESERVE ACT OF 1913
Federal Reserve Act in 1913 founded a system
of central banking that was both adaptable and
flexible.
A board of directors controlled district reserve
banks.
The original Federal Reserve Board
Secretary of the Treasury
Comptroller of the Currency
Presidential appointees with ten-year terms
Slide 14
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BANKS IN CRISIS
The stock market crash in October 1929
The Great Depression
Buying stock on margin
Bank runs
Slide 15
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The Emergency Banking Act of 1933
Also called the Glass-Steagall Act
Separated commercial banking from investment
banking to protect assets
Required bank holding companies to be
examined by the Federal Reserve
Established the Federal Deposit Insurance
Corporation (FDIC)
Slide 16
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The Banking Act of 1935
Expanded the monetary controls of the Federal
Reserve
Changed the structure of the Federal Reserve
Board
Removed the Secretary of the Treasury and
Comptroller of the Currency
Lengthened terms of board members
Slide 17
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MODERN BANKING
Basic banking system remained unchanged for
the rest of the twentieth century.
Federal Reserve and its chairmen became more
independent.
Inflation, recession, and modernization have
changed banking dramatically.
Slide 18
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INFLATION AND BANKING
Inflation is a collective rise in the supply of
money, incomes, and prices.
Stagflation is a combination of a stagnant
economy and high inflation.
Slide 19
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DEREGULATION
 Laws were passed in the early 1980s to let banks
compete more freely with other financial firms, opening
doors to the services available today.
 Many savings and loan institutions (S&Ls) took
advantage of new regulations to invest in commercial
real estate and speculative loans.
 These S&Ls failed during the recession of the mid-1980s.
 When the Federal Savings and Loan Insurance Corporation
(FSLIC) could not cover all the losses, the government
stepped in.
Slide 20
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THE REVOLUTION CONTINUES
The basic structure of the banking system
remains essentially as it was in 1913.
The business of banking, with its rapid
communication, its global information exchange,
and its marketing focus, little resembles the
banking industry of an earlier age.
Slide 21
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Lesson 2.4
THE FEDERAL
RESERVE SYSTEM
GOALS
Identify the organization of the Federal
Reserve system
Explain how the Federal Reserve
influences banks and the economy
Slide 22
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STRUCTURE OF THE FED
Chairman
Board of Governors
District Reserve Banks
Member Banks
Slide 23
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FUNCTIONS OF THE FED
Act as government’s bank
Act as the bank’s bank
Monitor bank operations
Establish and affect monetary policy
Slide 24
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THE GOVERNMENT’S BANK
Tax payments go to accounts in Federal Reserve
banks.
Government makes payments from these
accounts.
Federal Reserve is responsible for selling and
redeeming various government securities.
Slide 25
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THE BANKS’ BANK
Serves as a reserve bank for other banks
Processes payments between banks
Slide 26
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BANK SUPERVISION
Conducts bank examinations
Supervises international banks
Protects consumers
Slide 27
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MONETARY POLICY
Open market operations
Setting reserve requirements
Adjusting the discount interest rate
Slide 28
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FISCAL POLICY
Adjusting budgetary deficits or surpluses to
achieve economic goals
Role of Congress and the President
“Priming the pump” in an economic downturn
Slowing the boom economy
Slide 29
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