Banking Throughout History

Casey Rockwell

1791 Bank of the US

The Bank of the US is considered the First Bank of US (1791-1811). After the Revolutionary War the government was in debt and each state had a different currency. This created a need for the First Bank of the United States. It was conceived by Alexander Hamilition to handle the massive debt from the war and to create a uniform currency. In 1791 George Washington signed the charter drafted by the Congress. Up until the time of the charter, coins and bills issued by state banks were the nation's currency. Although it was very profitable, Congress voted to abandon the bank and it's charter in 1811. The decision was based on the fact that critics believed it was constraining economic development. The Second Bank was formed 5 years later. The printed money was called "greenbacks".

1816 Second Bank of the US

After the war of 1812, the US realized they could not fund another war without a national bank. In February 1816 the Second Bank of the US was founded. The bank went into operation on January 1817 and was headquartered in Philadelphia. It also has branches nationally. The Second Bank housed large quantities of other bank notes in reserve and had the power to discipline banks they thought were over-issuing notes. It served as a bank regulator, sort of like the Fed today. Unlike the First Bank, the Second Bank was very poorly managed and not as successful. In 1832 Andrew Jackson refused to renew the charter for the bank. He later began pulling federal deposits from the bank. This crippled the Second Bank and it continued to not do well until the charter ended in 1836.

1861 Civil War - Printing Currency

In 1860, a year before the civil war began, the government was in debt $64.8 million. After the war began the debt just kept growing and growing. The cost of the war was an estimated $5.2 billion. Before the Legal Tender Act in 1862 banks were allowed to print their own paper money. This money was called "greenbacks". Greenbacks had value because it was backed by gold. There was an amount of gold held by the government that was equal to the value of the paper money. All greenbacks printed after the Legal Tender Act was not backed by gold because the government didn't have that much gold at the time. Greenbacks could be used to pay taxes and buy items from stores. In December 1861 the banks had terminated payments in gold or silver coins for paper currency - called notes or bills. This prohibited people from converting bank notes into coins. The government responded by passing the Legal Tender Act in 1862 by issuing $150 million in national notes or the "greenbacks". Paper bills issued by state banks still accounted for most of the currency in circulation.

1863 National Banking Act

In January 1863 the National Banking Act was introduced by the Senate to fund the war and bring financial stability. Despite state and private sponsored efforts, the state banking system still needed reform. The National Banking Act of 1863 was created to attempt to allow some federal control over the banking system without the creation of another central bank. The main purposes were to create a system of national banks, create a uniform currency and to help finance the civil war by creating an active secondary market for Treasury securities. This act was passed by Congress to help with the financial crisis from the early days of the American Civil War (1861-1865). The war required lots of funding and there was no effective tax system to help fund it.

1913 Federal Reserve Act

On December 23, 1913, the Federal Reserve Act was signed into law by President Woodrow Wilson. The Federal Reserve Act was created by Congress to provide a safer, more flexible and stable financial system. The goal was to gain economic stability through the Central Bank. The Central Bank would become in charge of all monetary policy in the United States.

1930's Great Depression

The depression deepened in the early 1930's and the US economy was struggling. Farmers had less money to spend and the banks began to suffer and fail at alarming rates. By 1933 all of the banks in 48 states had either closed or put great restrictions on the amount of money that could be withdrawn. President Roosevelt's first act as President was to declare a national "bank holiday'. All banks closed for 3 days to have a cooling off period. A very famous line from the President's speech is geared towards the bank crisis. - "The only thing we have to fear is fear itself." Some people believe the Great Depression caused the banks to fail and some people believe that the banks failing caused the Great Depression.

1933 Glass-Steagall Banking Act

During the time of the great depression and the nationwide commercial bank failures, the Glass-Steagall Banking Act was created (June 16,1933). At this time it was believed that the banks failed because of the commercial banks involvement in stock market investment. This act was created to separate commercial and investment banking activities. The banks were given a year to decide if they wanted to be a commercial bank or an investment bank. This act was to stop the bank depositors from the risk associated with stock market volatilities. As a result, banks were not legally allowed to offer financial services, such as investments and insurance. It also prohibited national and state banks from affiiating with securities companies.

1970's Great Inflation

The great inflation began in 1972 and came to an end in the early 1980's. Some people believe that the great inflation in the 70's was a direct result of the mistakes made by the central bank. It is believed that the inflation was fueled by the lower interest rates brought on by FED.

1982 Recession in the US

The recession was mainly caused by the Federal Reserve's monetary policy. The recession hit a peak in November and December of 1982. At this time unemployment was 10.8%, the highest it had been since the Great Depression. By the middle of 1982, banks were in trouble and many of them were failing. As the banks were failing the interest rates were rising. At this time, 42 banks had already failed - that is only one less than during the Great Depression. That is almost By the end of 1982 FDIC had spent $870 million to purchase bad loans in order to keep the banks in business. The recession technically ended the end of 1982, but banks were affected well after the recession had ended. In 1983, another 50 banks failed - well surpassing the 43 that failed during the Great Depression.

1999 Gramm-Leach-Bliley Act

Congress passed the Gramm-Leach-Bliley Act on November 12, 1999. This act is an attempt to update and modernize the financial industry. It is also called the Financial Services Modernization Act of 1999. The main purpose was to repel the Glass-Steagall Banking Act of 1933. This act was created to integrated consumers and investors while keeping banking practices safe and secure. Under this act a consumer is protected against pretexting. The GLBA included 3 requirements to protect personal information. First, banks, brokerage companies and insurance companies must securely store customers personal information. Second, they must advise and individual of their policy of sharing personal financial information. Third, they must give the customer the option to opt-out of sharing their information.