Where We Are Now: Banking

Module 13 Lesson 2 Mastery Assignment

1791: Bank of the US

The First Bank of the United States was needed because the government had a debt from the Revolutionary War, and each state had a different form of currency. It was built while 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 served as the currency of the 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.

1816: Second Bank of the US

The Second Bank was founded after the War of 1812 when it was realized that without a national bank (the charter on the first bank was allowed to lapse) it would be impossible to fund another war such as the one just fought. Founded in 1816, the building was finished in 1818. William Strickland, one of the first great American architects designed the building, and Nicholas Biddle was the first president of the bank. After a long battle, Andrew Jackson disbanded the bank in the 1832 during his crusade against the national banking system.
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Civil War (printing currency)

The Civil War created a coinage shortage, so the first official paper currency of the United States entered circulation. They were called "Demand Notes" and came in $5, $10, and $20 increments printed in 1861. In 1862, they started producing United States Notes, also known as Legal Tender Notes, which more closely resembled our modern paper money. These notes were also known by the name of "Greenbacks." Coins were in such short supply that merchants had trouble making change, so they tried using credit slips or even using postage stamps as money. Therefore, in 1862 the U.S. government produced small paper notes in coin denominations: 5, 10, 25, and 50 cents. This was called Postage Currency or Postal Currency, but modern collectors prefer to call it Fractional Currency.

1863 National Banking Act

The National Bank Act of 1863 was designed to create a national banking system, float federal war loans, and establish a national currency. The act, passed by Congress during the Civil War, established a system of nationally chartered banks and required the currency issued by them to be backed by government securities. The act was subsequently amended to also require the taxation of state currencies, but not of national bank notes. This produced the intended effect of creating a uniform national currency. State banks and respective currency, none-the-less, continued to expand

1913 Federal Reserve Act

The 1913 U.S. legislation that created the current Federal Reserve System. The Federal Reserve Act intended to establish a form of economic stability through the introduction of the Central Bank, which would be in charge of monetary policy, into the United States. The Federal Reserve Act is perhaps one of the most influential laws concerning the U.S. financial system.

1930’s Great Depression (regarding banking)

In the wake of the stock market crash of October 1929, people were growing increasingly anxious about the security of their money. Wealthy people were pulling their investment assets out of the economy, and consumers overall were spending less and less money. Bankruptcies were becoming more common, and peoples’ confidence in financial institutions such as banks was being rapidly eroded. Some 650 banks failed in 1929; the number would rise to more than 1,300 the following year.

Glass-Steagall Banking Act

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 subsequent decades and was finally repealed in 1999.

1970’s (regarding banking)

The stock market is a mess. It loses 40% in an 18-month period, and for close to a decade few people want anything to do with stocks. Economic growth is weak, which results in rising unemployment that eventually reaches double-digits. The easy-money policies of the American central bank, which were designed to generate full employment, by the early 1970s, also caused high inflation. The central bank, under different leadership, would later reverse its policies, raising interest rates to some 20%, a number once considered usurious. For interest-sensitive industries, such as housing and cars, rising interest rates cause a calamity. With interest rates skyrocketing, many people are priced out of new cars and homes.

1982 (regarding banking)

1982: Congress allows S&L banks to make high risk loans and investments

Investments went bad

Banks failed

Federal government had to give investors their money back

Federal government debt: $200 billion

The FDIC took over the S&L

1999 Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act, 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.
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