1. Chapter 10: Money and Banking Section 2: The Development of U. S
Chapter 10: Money and Banking Section 2: The Development of U.S. Banking pg

2. The Origins of Banking in Europe
Modern banking arose in Italy in the Middle Ages.
They realized that they didn’t have to hold all the deposits, since all depositors didn’t reclaim their property at the same time.
This was the beginning of fractional reserve banking, or the practice of holding only a fraction of the money deposited in a bank and lending the rest.

3. The Origins of Banking in the U.S.
In colonial America the banks followed fractional reserve banking.
However, these banks were far from secure.
If the merchants business failed, depositors lost all their savings.
After the Revolutionary War, many state banks—banks chartered, or licensed, by state government—were established.
Some of these banks, however, followed practices that tended to create instability and disorder.
Many issued their own currency that was not linked to reserves of gold or silver held by the bank.

4. State Banks
Imagine what it would be like if every bank issued its own currency.
How would buyers know if sellers would accept their money?
How would sellers know if the money they received was worth anything?
That was the situation that faced the U.S. when the Constitution was ratified in 1789.

5. The First Bank of the United States
Alexander Hamilton, a Federalist, was the 1st Sec. of the Treasury in 1789 and he immediately set to bring stability to U.S. Banking.
He proposed chartering a privately owned national bank to put the government on a sound financial footing.
This bank would issue a national currency and help control money supply by refusing to accept currency from state banks that was not backed by gold and silver.
It also would lend money to the federal government, state banks, and businesses.

6. The Fight Over the 1st Bank of the U.S.
The Anti-federalists, led by Jefferson & Madison, interpreted the Constitution strictly, and the Constitution didn’t mention a Bank.
But Hamilton won the fight, and the 1st Bank of the U.S. was chartered in 1791.
It achieved many of Hamilton’s goals but Congress refused to renew its charter in 1811.

7. The 2nd Bank of the U.S.
W/o a central bank, the government had difficulty financing the War of 1812.
And state banks returned to unrestrained issuing of currency that was not linked to reserves of gold & silver. This led to inflation.
T/f Congress chartered the 2nd Bank of the U.S. in 1816.
The new bank had greater financial resources and succeeded in making the money supply stable.
Opponents, including President Jackson saw the bank as too powerful and too close to the wealthy.
Jackson vetoed the renewal of the bank in 1832.

8. Wildcat Banking
After 1836, there was no federal oversight of the banking industry, and all banks were state banks.
These banks issued their own paper money, called bank notes. They printed much more money then they had in gold or silver.
T/f these banks were susceptible to bank runs, when depositors demanded gold or silver for their currency.
Financial panics and economic instability were common results.

9. The Struggle for Stability
During the Civil War the government needed to finance its operations so they issued currency backed by government bonds.
In 1863, Congress passed the National Banking Act, which led to the creation of a system of national banks, chartered by the national gov.
This act provided for a national currency backed by U.S. Treasury bonds and regulated the amount of capital required.
Congress taxed state bank notes after 1865, effectively eliminating these notes from circulation.
In 1900, the gov. officially adopted the gold standard, a system in which the basic monetary unit was equal to a set amount of gold.
Money was now uniform throughout the country, backed by something of intrinsic value. And in limited supply.

10. The Struggle for Stability After 1900
The system of national banks & national currency linked to the gold standard initially brought stability.
But the economy still experienced inflation, recession, & financial panics largely due to the lack of a central decision-making institution that could manage the money supply in a flexible way to meet the economy’s changing needs.

11. The Federal Reserve System—the Fed
This was established in 1913 with the passage of the Federal Reserve Act.
The Fed is a true central bank. It consists of 12 Regional banks with a central decision-making board.
The Fed provides financial services to the federal government, makes loans to banks that serve the public, issues Federal Reserve notes as the national currency, and regulates the money supply to ensure that money retains its purchasing power.

12. The Great Depression and the New Deal
The Great Depression started in 1929 and it caused many bank failures.
As part of FDR’s New Deal program the Congress passed the Banking Act of 1933, which instituted reforms such as regulating interest rates that banks could pay and prohibiting banks from selling stocks.
The Federal Deposit Insurance Corporation (FDIC) provided federal insurance so that if a bank failed, people would no longer lose their money.
This legislation set the tone for almost 50 years by increasing the regulation of banking in the U.S.

13. Deregulation and the Savings & Loan (S&Ls) Crisis
Owners of S&Ls petitioned Congress for reduced regulation in 1980 & 1982 and Congress lifted the limits on interest rates.
Deregulation allowed S&Ls to take more risks in the types of loans they made.
As a result S&Ls failed and lost their depositors’ money.
To protect consumers, Congress agreed to fund the S&Ls industry’s restructuring, which cost taxpayers hundreds of billions of dollars.
Despite this crisis, the deregulation of banking continued (more in section 3).

14. Commercial Banks This is the oldest form of banking.
The Banking Act of 1933 created a distinction between commercial banks and investment banks.
Commercial banks provided basic banking services; investment banks bought and sold assets through the financial markets.
Deregulation did away with the distinction. Now commercial banks provide a wide range of services, including checking & saving accounts, loans, investment assistance, credit cards to both businesses and Individual consumers.
Deregulation led to a wave of mergers. There were over 12,000 commercial banks in 1990, but in 2005 there were about 7,500.
All national commercial banks belong to the FED, but only 15% of state-chartered banks join.

15. Savings and Loans (S&Ls)
S&Ls began in the U.S. in the 1830s.
They were chartered by states for two purposes-to take savings deposits and provide home mortgage loans.
T/f, groups of people pooled their savings in a safe place to earn interest and have a source of financing for families who wanted to buy homes.
After the S&L crisis the FDIC began insuring S&Ls in 1989.
The S&Ls continue to fulfill their original purpose but now they also provide services provided by commercial banks. Like sale of stock.

16. Credit Unions
Credit Unions began in Europe in the mid-1800s. They first started in the U.S. in 1909.
The Federal Credit Union Act of 1934 created a system of federally chartered credit unions.
CREDIT Unions are cooperative savings and lending institutions, like early S&Ls.
They offer services like saving and checking accounts but they specialize in mortgages and auto loans.
The major difference between credit unions and other Financial institutions is that credit unions have membership requirements.
They are nonprofit organizations owned and operated for members.