Banking in America

History, for those who care

First Bank of the United States

The First Bank of the United States was Alexander Hamilton's - then the Secretary of the Treasury - brainchild. Conceived by Hamilton to handle the enormous Revolutionary war debt and to formulate a common currency in the new country, First Bank's charter was drafted and signed by George Washington in 1791. Congress let the bank's charter expire just twenty years later in 1811. Built in Philadelphia (which was still the capital on the fledgling country),the bank building only cost $110,168.05


Second Bank of the United States

Chartered with the same responsibilities and powers as the First Bank's, the Second Bank was born in 1816. Plagued by poor management and fraud, the bank was not very successful. One of the bank's main purposes was to maintain a "currency principle" - to keep a stable specie/deposit ratio of 20% - however, the ratio fluctuated greatly. Also, the bank alienated the state banks by practicing sudden banknote redemption.

There were two attempts made to make the bank unconstitutional between 1818 and 1825. In 1819, McCulloch vs. Maryland, the Supreme Court unanimously decided the bank was constitutional. In Osborn vs. The Bank of the United Sates (1824), the Supreme Court reaffirmed their previous decision.

In the late eighteen twenties and thirties, the bank had a brief period of success. In 1832, Congress drafted a bill to renew the bank's charter and the president, Andrew Jackson, vetoed it. The charter expired in 1836.


Printing Civil War Money

The cost of the war was expensive. Federal debt before the war was 64.8 million and the debt after was 2.6 billion. During the war, the Union government passed the Legal Tender Act in 1862. Before this Act, banks could print their own money because paper money was backed in gold. This meant the government had an amount of gold that was equal to the amount of paper money printed. After the Legal Tender Act, the government's printed money was not backed by gold because the government did not have an equal amount of gold at the time. This is how paper money money became known as "Greenbacks."


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Banking Act of '63

The Banking Act of 1863 was an attempt by the government to gain control of banking without the establishment of another central bank. The three main purposes were:

  1. Create a system of national banks.
  2. Create a uniform national currency - the CSA printed their own currency during the war.
  3. Create an active secondary market for the treasury to help with war financing.


The Federal Reserve Act of 1913

Also know as the Currency Bill or the Owen-Glass Act, the bill called for 12 autonomous, regional reserve banks. These banks would be owned by commercial banks and their actions would be coordinated by a committee appointed by the president. The Reserve is also privately owned and is operated in public interest. Bankers running these twelve banks would be under the supervision of the Federal Reserve Board, consisting of the secretary of the Treasury, the Comptroller of the Currency, and other officials appointed by the president to represent public interest.


The Great depression (DUH-DUH-DAAAHH!)

Banking in the Great Depression was out of control, bad, and unreliable. Starting with the stock market crash in 1929, there were a series of banking scares and crises. A Bank panic arises when many depositors simultaneously lose confidence in bank solvency and demand their bank deposits to be paid to them in cash. Four of these banking scares hit the US in fall of 1930, spring of 1931, fall of 1931, and fall of 1932. After this last panic, President Roosevelt called for a national bank holiday, and had banks close until a government inspector team had verified that the bank was solvent.



Designed to provide safer and more effective uses of the assets in banks, regulate inter-bank control, and to prevent undue transfer of funds to speculative operations and other purposes; the act was introduced in 1932 and signed by President Roosevelt on June 16, 1933. Known as the Glass-Steagall Act because the main pushers were former Secretary of the Treasury, turned senator, Carter Glass and Sen. Henry Steagall, who was then chairman of the House Banking and Currency Committee. This act basically made it illegal for commercial banks (take deposits and make loans) to underwrite and deal securities. It also prevented investment banks which underwrite and deal securities from having close ties with or common ownership with commercial banks. It also gave tighter regulation of the national banks to the Federal Reserve.



Economics in the seventies were good in the beginning and were part of the "Golden Age" of US economics. Banking and other sectors involved in the economy were more regulated. The government was meant to prevent recessions, keep full employment, and stabilize the overall economy.
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In the nineteen eighties, there was a major Latin American debt crisis that caused them to lose service of their foreign debt. In July the Federal Open Market Committee (FOMC) felt action was needed. The Fed approved a bridge loan to Mexico. The Fed also encouraged US banks to do the same. While the immediate disaster was averted, the problem survived and resulted in high unemployment, loss of income per capita, and stagnancy or depreciation in Latin American countries.


G-L-B ACT 1999

The Gramm-Leach-Bliley Act of 1999 requires all financial institutions - which are businesses that offer consumers products or services like loans, financial or investment advice, or insurance - to explain their information-sharing practices with their customers and to safeguard all potentially sensitive data.