Money and
Banking
Economics
Chapter 10
Section 2 & 3 Notes
Alexander Hamilton:
Shaping a Banking System
 The


First Bank of the United States
In 1789, became first Secretary of the Treasury;
proposed national bank
Against strong opposition, First Bank of the
United States chartered in 1791
 issued
national currency
 controlled money supply by refusing state bank
money not backed
 loaned money to federal government, state banks,
businesses
20th-Century Developments
A
New Central Bank
 1913,
Federal Reserve System created;
consists of 12 regional banks, one decisionmaking board
 provides financial services to federal
government
 makes loans to banks that serve the public
 issues Federal Reserve notes as national
currency
 regulates money supply
20th-Century Developments
 The
Great Depression and the New
Deal
 1929,
many banks failed due to bank runs
 Banking Act of 1933 part of President
Franklin Roosevelt’s New Deal
 regulated interest rates banks paid;
prohibited sale of stocks by banks
 Federal Deposit Insurance Corporation
(FDIC) insured people’s savings
Financial Institutions in the United
States
 Type
1: Commercial Banks
 Privately
owned commercial banks are
oldest type of banks
 initially created to provide business loans
 today, checking and savings accounts,
loans, investments, credit cards
 All national, about 16 percent of state
commercial banks belong to the Fed
Financial Institutions in the United
States
 Type

2: Savings Institutions
S&Ls first chartered by states in 1830s
 took
savings deposits; provided home mortgage
loans
 today, provide many of same services as
commercial banks

Since 1933, federal government also charters
S&Ls
 many
banks
federally chartered S&Ls call selves savings
Financial Institutions in the United
States
 Type

3: Credit Unions
In 1909, first credit union chartered; 1934,
federal system created
 offer
savings and checking accounts; specialize
in auto, mortgage loans
 deposits insured by National Credit Union
Association (NCUA)

Credit unions have membership requirements
 cooperatives:
nonprofit organizations owned by,
operated for members
Section 3
Innovations in Modern Banking
What Services Do Banks Provide?
 Service
Money
 Banks
1: Customers Can Store
store currency in vaults; insured
against theft, other loss
 Customers also store
 money in bank accounts; insured
against bank failure
 papers and valuables in safe deposit
boxes
What Services Do Banks Provide?
 Service
2: Customers Can Earn Money
 Savings
accounts, some checking
accounts pay interest
 Money market accounts, CDs pay higher
interest rate
What Services Do Banks Provide?
 Service
 Banks
3: Customers Can Borrow Money
lend money through fractional reserve
banking
 percent of deposit banks must keep is set by
Fed
 Banks make loans to customers it approves
 loans have set time period and interest rate;
property is collateral
 Credit card purchases are loans; interest
charged after one month
Banking Deregulation
 Bank


Mergers
Deregulation led to mergers; no more
restrictions on interstate banking
Advantages: more competition meant low
interest rates, more services
 also
more branches; economies of scale,
especially for technology

Disadvantages: fewer banks to choose from
 fear
larger banks uninterested in small
customers, local communities
Banking Deregulation
 Banking


Services
Financial Services Act of 1999 lifted last
restriction on banks
Banks, insurance companies, investment
companies compete
 sell
stocks, bonds, insurance, traditional
banking services

Customers continue to use different
companies for different services
Housing Boom and Bust
 From
2000 to 2006, house prices in the
U.S. skyrocketed. Many factors
contributed to this boom, but bank
lending practices played a major role.
 Deregulation changed banks from local
institutions into national megabanks.
Instead of collecting payments on a
mortgage for 30 years, banks began to
sell these loans to other financial
institutions for a quick profit.
Housing Boom and Bust
 Banks
became less interested in
verifying that clients could repay a
mortgage and more interested in
making as many mortgage loans as
possible. The easy money fueled the
housing price bubble.