Banking Through the Years

Julia Hogan

1791 Bank of the US

The First Bank of the United States was made because the government had a debt from the Revolutionary War and each state had a different form of currency. That was a problem because we were trying to unify our states into one country and it made it more difficult to achieve that if each state had a different form of currency. It was built during the time Philadelphia was still the nation's capital. Alexander Hamilton conceived of the bank to handle the colossal war debt and to create a standard form of currency.

Up to the time of the bank's charter, coins and bills issued by state banks were the currency of our young country. The First Bank's charter was drafted in 1791 by the Congress and signed by George Washington. In 1811, Congress voted to abandon the bank and its charter. The bank was originally located in Carpenters' Hall from 1791 to 1795. At the time of the bank's creation the eagle had been our national symbol for only 14 years. The bank building was restored for the Bicentennial in 1976.

1816 Second Bank of the US

The Second Bank of the United States was created for many of the same reasons as the First Bank of the United States. The War of 1812 had left a gigantic debt. Inflation surged even farther skyward due to the increasing amount of notes issued by private banks. To try and resolve some of these problems, President Madison signed a bill authorizing the 2nd Bank in 1816 with a charter lasting 20 years.

In the late 1820s an extreme clash erupted between President Jackson and bank President Nicholas Biddle. On one side was Andrew Jackson, Old Hickory, and his supporters who claimed the Bank was a threat to the country and democracy due to its economic power. State bankers felt the central bank's influence was hindering their ability to function. Westerners and farmers claimed the bank was a threatening tool of city folks and overseas interests.

On the other side of the debate stood Nicholas Biddle, an urbane resident of Philadelphia. Supporters of Biddle's bank outnumbered detractors however. 128,117 people signed petitions to save the bank as opposed to 17,027 who signed petitions opposing the bank. Ultimately Jackson triumphed when he vetoed Congress's 1832 recharter. Jackson considered his 1832 election triumph over pro-bank candidate Henry Clay a mandate of his anti-bank policy. The bank ceased to function in 1836.

The Civil War and Printing Currency

The Confederate States of America released their first issue of paper money in April, 1861, when their government was only two months old. The Civil War started that same month and the US Congress, on the verge of bankruptcy and hurried to finance the Civil War, authorized the United States Treasury to issue paper money for the first time that same year. The US notes were in the form of Treasury Notes called Demand Notes.

The total amount of currency issued under the various acts of the Confederate Congress totaled $1.7 billion. However, due to the scarcity of metal, the Confederacy never issued coins. They instead released seventy different paper note 'types' between 1861 and 1865.

Counterfeiting was a major problem for the Confederacy, owing both to the vast number of Confederate notes and varietals, and to the fact that Southern states and banks could issue their own notes. The average Southern citizen would be hard pressed to tell a real note from a fake. Many of these contemporary counterfeits are known today and can be worth as much to a collector as a real note.

National Banking Act 1863

The National Bank Act of 1863 was designed to create a national banking system, float federal war loans, and establish a national currency. Congress passed the act to help resolve the financial crisis that emerged during the early days of the American Civil War. The fight with the South was expensive and no effective tax program had been drawn up to finance it. In December 1861 banks suspended specie payments (payments in gold or silver coins for paper currency called notes or bills). People could no longer convert bank notes into coins, which caused many problems.

In order to bring financial stability to the nation and fund the war effort, the National Bank Act of 1863 was introduced in the Senate in January of that year. The bill was approved in the Senate by a close vote of 23 to 21, and the House passed the legislation in February. National banks that were organized under the act were required to purchase government bonds as a condition of start-up. As soon as those bonds were deposited with the federal government, the bank could issue its own notes up to 90 percent of the market value of the bonds on deposit.

The National Bank Act improved but did not solve the nation's financial problems. Some of the 1500 state banks, which had all been issuing bank notes, were converted to national banks by additional legislation but other state banks were driven out of business or ceased to issue notes after the 1865 passage of a 10 percent federal tax on notes they issued. The legislation created $300 million in national currency in the form of notes issued by the national banks.

But because most of this money was distributed in the East, the money supply in other parts of the country remained precarious; the West demanded more money. This issue would dominate American politics for many years after the Civil War. Nevertheless, the nation's banking system stayed largely the same (despite the Panic of 1873) until the passage of the Federal Reserve Act in 1913.

Federal Reserve Act 1913

The bill called for a system of eight to twelve mostly autonomous regional Reserve Banks that would be owned by commercial banks and whose actions would be coordinated by a committee appointed by the President. The Federal Reserve System would then become a privately owned banking system that was operated in the public interest.

The House of Representatives passed the Federal Reserve Act by a vote of 298 to 60 with some protest. President Wilson signed the bill on December 23, 1913 and the Federal Reserve System was born. Bankers largely opposed the Act because of the presence of the Federal Reserve Board in the legislation and because only one of its seven members could represent the banking community.

The Federal Reserve system as it exists today is not quite the same creature that was produced in 1913. The system has undergone rare, but substantial overhauls over the years. The two most important changes occurred in response to the Great Depression and to the mini-crisis of the late 1970's.

1930's Great Depression- Banking Disaster

The run on America’s banks began immediately following the stock market crash of 1929. Hundreds of thousands of customers began to withdraw their deposits overnight. With no money to lend and loans going south as businesses and farmers we under, the American banking crisis deepened.

After taking office in March 1933, Franklin D. Roosevelt did his best to try and fix the failing banking system. When a third banking panic in less than four years threatened, he announced a three-day bank holiday to stop the run on banks by halting all financial transactions. When the banks could reopen, nearly 1,000 banks had been saved.

On January 1, 1934, the Federal Deposit Insurance Corporation (FDIC) was established, and since that time, not a single depositor has lost funds that were insured. Prior to the fall of 2008, FDIC insured bank accounts up to $100,000. The Bush Administration changed those levels to $250,000 when Bush was President.

Glass-Steagall Banking Act

The Glass-Steagall Act was an act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment banking business. The Glass-Steagall Act was sponsored by Senator Carter Glass, a former Treasury secretary, and Senator Henry Steagall, a member of the House of Representatives and chairman of the House Banking and Currency Committee. The Act was passed as an emergency measure to counter the failure of almost 5,000 banks during the Great Depression. The Glass-Steagall lost its potency in succeeding decades and was finally repealed in 1999.

1970's Banking Collapse

In the problematic interest rate climate of the '70s, large numbers of depositors removed their funds from savings and loan institutions (S&Ls) and put them in money market funds. There they could get higher interest rates since money market funds weren't governed by Regulation Q, which capped the amount of interest S&Ls could pay to depositors. S&Ls were largely making their money from low-interest mortgages. They did not have the means to offer higher interest rates, though they tried to once interest rate ceilings were dropped in the early '80s. As S&L regulations loosened, they engaged in increasingly risky activities, including commercial real estate lending and investments in junk bonds.

Because S&L deposits were insured by the Federal Savings and Loan Insurance Corporation (FSLIC), depositors continued to put money into these risky businesses. A complex compilation of these factors and others, combined with widespread corruption, led to the breakdown of the FSLIC. It also caused implosion in the government bailout of the thrifts to the tune of $124 billion in taxpayer dollars and the liquidation of 747 insolvent S&Ls by the U.S. government's Resolution Trust Corporation.

1982 Credit Disaster

Often overlooked amid the disaster of the 2008 credit bubble collapse, what became known as the S&L crisis ultimately led to a massive taxpayer-funded rescue of the banking industry that had almost entirely collapsed.

The banking crisis of the 1980's was a double-edged sword, one edge related to the failure of savings and loans (the S&L crisis), which represented the bulk of the assets and number of banks, and the other linked to the failure of large commercial banks.

There is no single factor that led to the surge in failed banking institutions in the United States during the 1980's and early 1990's. Prior to the onset of the crisis, the legislative and regulatory environments were changing. Fraud, economic down turns, and the collapse of the real estate market were also factors to this crisis.

1999 Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act (GLB Act or GLBA), also known as the Financial Modernization Act of 1999, is a federal law enacted in the United States to control the ways that financial institutions deal with the private information of individuals.

The Act consists of three sections: The Financial Privacy Rule, which regulates the collection and disclosure of private financial information; the Safeguards Rule, which stipulates that financial institutions must implement security programs to protect such information; and the Pretexting provisions, which prohibit the practice of pretexting (accessing private information using false pretenses). The Act also requires financial institutions to give customers written privacy notices that explain their information-sharing practices.