History of the Banking Industry

Module 13 Lesson 2 Mastery Assignment. By Campbell Edwards

1791 Bank of the U.S.

The first bank of the United States was created in 1791 with the signing of a charter by President George Washington. The intention of the bank was to make payments and fees of the federal government. Alexander Hamilton was one of the biggest supporters and fighters for the national bank, after it was drawn up in Philadelphia. Thomas Jefferson and James Madison, however, believed that it was created for the "rich" and that the government was not given the power to a central bank from the Constitution. The bank was both a success and a failure. The bank succeeded in that it helped with the debt from the Revolutionary War. Also the government owned 20% of it, and it was shaped after the Bank of England. Eventually it became apparent that this bank would not last, especially since state banks were still using their own form of currency.

1816 Second Bank of the U.S.

When the time came, after the War of 1812, the central bank was renewed. Its renewal almost occurred in 1811, but it did not pass the vote. In 1816, however, the United States was recovering from yet another war, and was in need of money. President Madison signed for the beginning of the Second Bank of the United States. Then, the second bank was a success! The entire debt was payed off because of the bank. This new bank had more sections, more money, and more power. Now, there was another successful federal bank in the U.S. It even helped to fund the western expansion. When Andrew Jackson became President, he did not want to continue with the bank. He did not believe in the form of currency, or the bank itself. In 1836 he vetoed the bank's renewal.

Civil War (printing currency) 1861

Before the Civil War, state banks and many corporations started using paper money. The problem was that there were was much variance between all of the forms of this new currency. People stated having trouble figuring out what was real and what was fake, and it soon became apparent that not using the same form of currency throughout the nation was problematic. By the time the civil war came around, only the confederates continued the use of paper slips. However, when they lost the war, they also lost their money. The paper slips went from a form of currency to a promise of currency to absolutely nothing.

1863 National Banking Act

Once 1863 rolled around, things changed. Still in the Civil War, the National Banking Act was passed. This Act officially allowed for both national and state banks. But how did this solve the problem of multiple currencies? The now allowed, national chartered banks began to produce notes that were backed by national treasury securities, which allowed the people to trust in one form of currency. Lastly, the act used these new treasuries to help finance the war. This act was very significant because it avoided creating another central bank, but was able to fix the problem of currency, provide national banks, and help pay for the war.

1913 Federal Reserve Act

Apparently the third time is the charm. Despite the failures of the first two attempts, in 1913 the Federal Reserve Act established our current national bank. But what changed? The Federal Reserve was centered in Washington D.C., but the national banks were distributed across the nation in 12 different locations. These locations were based off of the population and the amount of money in the region. The "Fed" continues to function today, and has three purposes. 1. oversee commercial banks. 2. enforce laws that deal with consumer borrowing. 3. act as government in terms of money with bonds, bills, and handling the circulation of currency.

1930's Great Depression

Right after the stock market crashed and the Great Depression began, the banks across the entire nation began to suffer. Hundreds and hundreds of banks began to fail, which caused the most financial problems out of all of U.S. history. But one of the most significant details about banking in the Great Depression was the poor job that the Federal Reserve did in helping the economy. The Federal Reserve was created with the purpose of helping the economy, through liquidation. Yet, the Fed was not doing enough, and banks continued to fail. To stop this, the new President Franklin D. Roosevelt declared a "bank holiday" in which all of the banks were forced to close until they were established as stable enough to be open.

Glass-Steagal Banking Act of 1933

In 1933, two members of Congress, Glass and Steagal, came up with an act that put a blame on the economic depression. These two men believed that the banks were being too "risky" with the people's money. Therefore, the act states that if a bank fails, the people do not lose their money. In order to do this, the act established the Federal Insurance Corporation. Since this occurred, banks were not allowed to participate in the investment banking business. The act worked in preventing as many bank failures, but it was eventually repealed in 1999.

Banking in the 1970's

After everything that happened in the 30's with the Great Depression, there were heavy restrictions on banks and people were still very nervous about the economy. The Second World War occurred and debt piled up again. The main problem of the 1970s, however, was the fact that inflation continued to grow. The dollar began to become worth less and less. The only way to stop this was for the Fed to increase the Federal funds rate. As this occurred, it cost even more money for the banks to get money from Fed. This led to the banks giving out less loans, and in turn lowered the money supply. By lowering the money supply, inflation slowed. The banks were then given back some of the liberties they originally had, and could make somewhat risky decisions.

Banking in 1982

Finally, in 1982 the banks were given some relief. The tight restrictions put in place by congress were officially loosened. This led to the Savings and Loans banks making risky loans and investments, which did not have a positive result. Investments went bad, more banks failed, and the Federal Government had to pay back investors for the money they lost. With the $200 billion that these banks caused the Federal government, the FDIC took control of te Savings and Loans banks.

1999 Gramm-Leach-Bliley Act.

As mentioned before, the Glass-Steagal Act was repealed in 1999. This was done through the Gramm-Leach-Bliley Act. This new act repealed the part of the act that stated that banks and other organizations could not be both an investment and a commercial bank. The new act stated that these institutions could be any combination of a investment bank, commercial bank, or a insurance company. The Gramm-leach-Bliley Act basically gave more freedom to banks in terms of banking, insurance, and securities as well as requiring them to share their information with their customers.