Unit 5 Microeconomics:
Money and Finance
Chapters 10.2
Economics
Mr. Biggs
The History of
American Banking
Bank - An institution for receiving,
keeping, and lending money.
American Banking Before the
Civil War
During the early history of the United
States, banks were very informal
businesses that merchants managed
in addition to their regular trade.
Deposits in these early informal
banks were not very secure.
Two Views of Banking
In the 1790s, Alexander Hamilton and the
Federalists believed that a centralized
banking system was necessary for the
United Stated to develop healthy industries
and trade.
Hamilton proposed the creation of a
national bank.
National bank - A bank chartered or
licensed by the federal government.
Thomas Jefferson and the Antifederalists
wanted a decentralized system where the
individual states would establish and
regulate the banking within their borders.
The First Bank of the United States
In 1791 the Congress set up the Bank of the
United States.
The bank succeeded in bringing order and
stability to American banking.
The Antifederalists argued that a national bank
was unconstitutional.
In 1804, Alexander Hamilton was killed in a duel
with Aaron Burr and the United States Bank lost
its main backer.
The bank only functioned until its charter ran
out in 1811.
Chaos in American Banking
Once the first bank’s charter expired, state
banks began issuing bank notes not backed by
gold.
The result was financial confusion, increased
prices, and lack of confidence.
The Second Bank of the United
States
The Second Bank of the United States
was chartered for 20 years in 1816.
It ensured that state banks had sufficient
reserves to cover notes they issued.
Despite difficulties arising from
decentralized banking, many Americans
distrusted a national bank.
This included President Andrew Jackson,
who vetoed the renewal of its charter in
1832.
The Free Banking Era
The fall of the Second Bank triggered a
period dominated by state banks.
The period between 1837 and 1863 is
known as the “Wildcat Era” of banking
and was noted for its high rate of
failure.
State chartered banks often did not
keep enough gold and silver to back
the paper money they issued.
This caused bank runs.
Bank run - Widespread panic in which
great numbers of people try to redeem
their paper money for gold or silver.
Fraud and the use of many different
currencies were problems associated
with state chartered banks.
The Later 1800s
By 1860, 8,000 different banks were issuing
currency.
Currency in the North and South
Greenbacks - Paper currency issued by the
U.S. government during the Civil War.
The South issued confederate currency
based on cotton.
The confederate currency eventually
became worthless.
Unifying American Banks
The National Banking Acts of 1863 and 1864
gave the federal government the power to:
Charter banks
Require banks to have sufficient reserves
Issue a national currency
The Gold Standard
In the 1870s the United States adopted the
gold standard.
Gold Standard - A monetary system in which
paper money and coins are equal to the
value of a certain amount of gold.
This gold standard restored confidence and
stability after the Civil War.
Banking in the Early Twentieth Century
Continuing problems in the nation’s banking
system led to the Panic of 1907.
Some banks did not have adequate reserves and
had to stop exchanging gold for paper money.
As a result of the 1907 crisis, the government
made plans to reinstate a central bank.
The Federal Reserve System
The Federal Reserve Act of 1913 established
the Federal Reserve System.
Federal Reserve System - The nation’s central
banking system.
Central bank - Bank that can lend to other
banks in time of need.
The system has twelve regional Federal
Reserve Banks called member banks.
Member banks - Bank that belongs to the
Federal Reserve system.
Each of the regional Federal Reserve Banks
allows member banks to borrow money to meet
short term demand and prevent panics.
Federal Reserve notes - The national currency
we use today in the United States.
This allows the Federal Reserve to control the
amount of money in circulation.
Banking and the Great Depression
The Fed helped to restore confidence in the
nation’s banking system, but could not prevent
the Great Depression.
Great Depression - A severe economic decline
that lasted for more than a decade.
During the 1920s, banks made many high risk
loans that were not paid back, farmers had
crop failures, and the stock market crashed.
Thousands of banks across the country failed.
Banking Reforms
The banking system was taken off the gold
standard and an individual’s ability to exchange
dollars for gold was restricted.
A fiat currency was established.
Congress established the Federal Deposit
Insurance Corporation (FDIC) in 1933.
Banking in the Later
Twentieth Century
Through the 1960s, the
interest rate banks could pay
depositors and the interest
rate banks could charge for
loans was highly regulated.
The government relaxed
banking regulations in the
1970s and 1980s.
The Savings and Loan Crisis
Banking deregulation along with high
interest rates, bad loans, and fraud caused
many Savings and Loans to fail.
In 1989, the Financial, Reform, Recovery,
Enforcement Act (FIRREA) was passed
which abolished the independence of the
savings and loan industry and transferred
insurance responsibilities to the FDIC.
Banking in the 1990s
In 1999 the Glass-Steagall Act (Banking
Act of 1933) was repealed.
Banks could now sell stocks and bonds
instead of having to decide whether they
are investment banks or commercial
banks.
The
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