Banking In The United States: 1791 to 2017 Fall, 2017

First Bank of the United States, Second Bank of the United States, State & National Banking Eras

• What led to the development of your bank or banking system?

• What were some key historical and political events during the time of your banking system?

• Explain how and why they were significant

• What are some key details of your banking system?

• Explain how and why they were significant

• Why did your banking system end?

• What mistakes were made by politicians during this era? Is it similar to today?

First Bank of the United States

• First Bank of the U.S. chartered in 1791

• Constitution did not specifically authorise a bank

• Hamilton, a Federalist, pushed for bank

• Opponents argued it restricted economic growth

• Charter lapsed in 1811

Second Bank of the United States

• Inflation, financial difficulties during War of 1812 resulted in Second Bank of U.S. in 1816

• Bank had a 20-year charter

• Whig-Democrat class struggle of Jacksonian Era

• Jackson hated bank; vetoed charter renewal

• Federal oversight of banking ended in 1836

“Wildcat” Banking Era, 1837-1863

• All banks were state banks — no federal oversight of industry

• Increased need for financing led to easy bank charter requirements by states

• Banks issued their own paper currency

• Banks were susceptible to bank runs

• Origin of the term “wildcat” — banks in remote areas, some bounties for dead wildcats

The Struggle for Stability

• Congress passed National Banking Acts of 1863 and 1864

• Created system of nationally chartered banks

• Development of national currency (“greenbacks”) backed by government bonds

• Congress taxed state bank notes

• Financial panics and plight of farmers led to push for coinage of silver

• Government increased coinage of silver — Sherman Silver Purchase Act

• Repealed after Panic of 1893

• 1900: Congress passes Gold Standard Act, formally placing US on gold standard

Banks in the 20th Century

• Continued economic instability — nation needed a central decision-making institution

• The Federal Reserve Act

• Was a true central bank

• Central devision-making board and 12 regional banks

• Provided financial services to government, regulates money supply, makes loans to banks

• Created Federal Reserve Notes

• All nationally-chartered banks were to become members of the Federal Reserve System

Banks in the 20th Century: The Great Depression

• Great Depression

• Many banks failed due to bank runs

• New Deal: Banking Act of 1933

• Also known as Glass-Steagall Act

• Created FDIC, which insured bank deposits

• Separated commercial and investment banking

• Set example of increased regulation for roughly 50 years

• FDR Temporarily took nation off gold standard

Deregulation and the Savings & Loan Crisis

• Congress began to deregulate savings & loan associations in the early 1980s

• S&Ls were constrained by interest rate rules

• Goal was to allow them to increase profits

• Bank runs began in 1985

• Home State Savings Bank in Cincinnati was one of the first

• Problem: unsound real estate lending; government spent billions to bail out banks

• Congress created Office of Thrift Supervision (Department of the Treasury) to oversee savings institutions

• Moral hazard: a tendency to take risks because the costs are borne by a different party

Modern History of United States Banks

Into the 21st Century: More Deregulation

• Financial Services Modernization Act of 1999

• Also known as Gramm-Leach-Bliley, removed the last restrictions of the Glass-Steagall Act of 1933

• Further deregulation

• Banks, insurance companies, investment companies can now sell same products and compete with one another

• Did this create too-big-to-fail institutions? More moral hazard?

• Joseph Stiglitz: yes

• The role of deregulation in the subprime mortgage financial crisis is a matter of debate

More Reform: Dodd–Frank Wall Street Reform and Consumer Protection Act

• Bill is the biggest change to financial regulation since the Great Depression

• Signed by President Obama on July 21, 2010

• Response to recession

• Bill highlights

• Creates consumer protection group

• New capital and leverage requirements; ends bailouts, limited trading that banks can do

• Increases bank oversight by government

• Bill is over 2,000 pages long, we don’t really understand the effects...yet...

Summary• Order of events

• First Bank of the United States

• Second Bank of the United States

• Wildcat Banking Era

• National Banking Acts of 1863 and 1864

• Federal Reserve Act (1913)

• National Banking Act of 1933 (Glass-Steagall)

• Deregulation of S&L Industry, 1980s

• Financial Services Modernization Act, 1999 (Gramm-Leach-Bliley)

• Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank)