Banking Industry Assignment

Banking industry history of the United States of America.

1791 Bank of US

*The first bank of the United States.

*Bank was functional from 1791 to 1811.

*This bank was established in 1791 to serve as a repository for federal funds.

*The First Bank of the US was initially proposed by Alexander Hamilton.

*The bank was based in Philadelphia with branches in 8 cities.

*It was used to conduct general commercial business as well as acting for the government.

*During 1811, the argument in favor of the banks renewal was that its circulation of about 5 million USD in paper currency accounted for about 20% of the nation's money supply. *This may have led to the downfall of the bank in 1811, ironically.


1816 Bank of the US

*The second established bank of the United States.

*Problems relevant to the funding of the War of 1812 led to a revival of interest in having a central bank, and in 1816, the Second Bank of the United States was established, with very similar functionality compared to the first.

*Many economic historians considered this bank an extreme success.

*Reasons for establishing this bank was that the War of 1812 had left a formidable debt and inflation surged upward due to the ever-increasing amount of notes issued by private banks.

*For these reasons, President Madison signed a bill authorizing the 2nd bank in 1816 with a charter that lasted 20 years.

*In the late 1820s, a clash between President Jackson and bank President Biddle erupted.

*This clash occurred due to President Jackson and his supporters claiming that the bank was a threat to the republic due to its economic power..

*the bank ceased to function in 1836.


Civil War (printing currency)

*In 1860, the year before the American Civil War started, the US government debt was over 60 billion USD. Once the war began, debt grew quickly.

*To pay for the war, the Confederate government issued a vast array of paper currencies. Each state made its own currency, as did banks, insurance companies, etc. This led to extreme confusion. The Government had to come up with new ways to pay for the civil war. 2 ways the government accomplished this were:

-The Legal Tender Act

-The National Bank Act

*The Legal Tender Act was established in 1862.

*Before the Legal Tender Act, each bank could print its own form of paper money; paper money had value because it was backed by gold.

*The Legal Tender Act allowed the government to print paper money known as greenbacks, and allowed them to sell 500 million USD in bonds to raise money.

*The greenbacks was not backed by gold but was still used as legitimate money.

*The National Bank Act was established in 1863.

*This act allowed for the creation of a nationwide banking system that loaned money to the government to pay for the war and a national system of paper money and coins.


1913 Federal Reserve Act

*The federal Reserve act was intended to establish a form of economic stability through the introduction of a Central Bank into the US.

*This act was enacted on December 23, 1913.

*This act created the current federal reserve system.

*Prior to this act, investors were unsure about the safety of their deposits.

*Reserve banks has the ability to print money to ensure economic stability.


1930's Great Depression

*Federal Reserve reduces money supply by 33% from 1929 to 1933.

*A banking panic occurred in the fall of 1930. Many depositors simultaneously lost confidence in the banks and demanded their bank deposits to be paid back in cash.

*The federal reserve took minimal action against the banking panics.

*By 1933, 1/5th of the banks in existence at the start of 1930 had failed.

*The final bank wave of panics continued through the winter of 1933.

*President Roosevelt then declared a national "bank holiday".

*The bank holiday closed all national banks, and they were permitted to be reopen after being deemed solvent by government inspectors.


Glass-Steagall Act

*An act that was passed in 1933 by the US Congress.

*It prohibited the commercial banks from participating in the investment banking business.

*This act was sponsored by a treasury secretary called Henry Steagall.

*The act was passed as an emergency measure to counter the failure of almost 5000 banks during the great depression.

*The Glass-Steagall act also created the Federal Deposit Insurance Corp.

*The act also created the Federal Market Committee and introduced Regulation Q, which prohibited banks from paying interest on demand deposits and capped interest rates on other deposit products.

*The Glass-Steagall lost its potency in decades and was later repealed in 1999.



*The 1970s saw the inflation skyrocket as producer and consumer prices rose, oil prices soared and the dederal defecit more than doubled.

*By August, 1979, drastic action was needed to break inflation's stanglehold on the American economy.

*In 1973, 11000 of the nation's 12648 commercial banks had assets of less than $25 million.



*A recession occurred in the early 1980s.

*This recession began in July of 1981 and ended in November of 1982.

*The main cause of this recession was the Federal Reserve's policy taht sought to rein in the high inflation.

*Unemployment had risen to its peak in 1982.

*In 1982, Michigan has an unemployment of 14.5% of the population, Alabama had an unemployment percentage of 14.3%, and West Virginia had an unemployment percentage of 14%.

*By mid 1982, the number of bank failures was rising dramatically.

*Bank failures reached a post-depression high of 42 as the recession and high interest rates took their toll.

*Towards the end of the year in 1982, The Federal Deposit Insurance Corp had spent over $870 million to purchase bad loans to essentially keep various banks functional.

*In July 1982, Congress enacted the Germain Depository Institutions Act which further deregulated banks as well as deregulated loans.

*The Recession impacted the banking industry long after the economic downturn ended in November of 1982.


The 1999 Gramm-Leach-Bliley Act

*As mentioned above, this act repealed a part of the Glass-Steagall Act.

*It is also known as the Financial Services Modernization Act of 1999.

*Many of the largest banks desired the act at the time.

*Prior to the act, most financial services companies already offering both saving and investment opportunities to their customers.

*Before this act, there was already many relaxations of the Glass-Steagall act, this act simply completely repealed it.

Thats all folks...