Chapter 15 Banks and Banking Lesson 1 – The History of American Banking Lesson 2 – Banking Today

Lesson 1 – A History of American Banking

Lesson 1 Focus 1. The history of banking in the U.S. is the story of shifts between a centralized, national banking system and independent state and local banks. 2. Out of these shifts has developed the stable banking system in which we place our confidence today.

Lesson 1 Key Terms Bank National bank Bank run Greenback Gold standard Federal Reserve System Central bank Member bank Federal Reserve Note Great Depression Federal Deposit Insurance Corporation (FDIC)

Banks Bank – an institution for receiving, keeping, and lending money

American Banking Before the Civil War During the early years banks were informal businesses run by local merchants

Two Views on Banking Federalists vs. Anti-Federalists Alexander Hamilton believed in a centralized bank so the US could develop healthy industries and trade National bank – a bank chartered, or licensed, by the national government Thomas Jefferson decentralized banking system that allowed the states to make their own rules

The 1st Bank of the U.S. 1791 – The Bank of the United States Used to: Hold collected taxes Helped government tax, borrow money, regulate trade Issue representative money Anti-federalists worried the bank would only loan to the rich Did the Constitution allow a national bank? Its 20 year charter ran out in 1811

Chaos in American Banking States started charting banks They didn’t back the notes with gold/silver Prices rose rapidly Consumers didn’t have confidence in these banks

The 2nd Bank of the United States The 2nd Bank was chartered in 1816 Slowly started to rebuild the nations confidence in a national bank President Andrew Jackson opposed the idea Nicolas Biddle was the one in charge of the 2nd Bank President Jackson vetoed the bank’s renewal of its charter in 1832

The Free Banking Era Between 1837 and 1863 known as the Free Banking or ‘Wildcat’ Era State chartered banks tripled leading to: Bank runs and panics – when people tried to redeem their money at once Wildcat banks – located on the edge of settled areas Fraud – some banks plain cheated Different currencies – some issued their own money which were worthless

The Later 1800s By 1860 8,000 different banks were issuing currency The federal government played no role in issuing paper currency The Civil War starting in 1861 makes everything worse

Currency in the North and South 1861 the US Treasury offered ‘demand notes’ but were called green backs because of their color The South printed currency backed by cotton

Unifying American Banks The federal government enacted the National Banking Acts of 1863 and 1864: The power to charter banks The power to require banks to hold adequate supplies of gold and silver in reserve The power to issue a single currency

The Gold Standard Gold Standard set in the early 1870s, it was a system in which paper money and coins are equal to a certain amount of gold

Banking in the Early 20th Century The Panic of 1907 caused a huge number of banks to fail The government made plans to reinstate a central bank

The Federal Reserve Act of 1913 The Federal Reserve System, often referred to as “the Fed,” is a group of 12 regional, independent banks. Initially the Federal Reserve System did not work well because the actions of one regional bank would counteract the actions of another. A Stronger Fed In 1935, Congress adjusted the Federal Reserve structure so that the system could respond more effectively to crises. Today’s Fed has more centralized powers so that regional banks can work together while still representing their own concerns.

The Federal Reserve System

Banking and the Great Depression Banks in the 1920s loaned huge sums of money out Stock prices crashed Bank runs 1000’s of banks failed No trust in banks

Banking Reforms A ‘bank holiday’ enacted by FDR to restore trust in the banks FDIC – today $250,000

Banking in the Later 20th Century Banks were closely regulated from 1933 through the 1960s. By the 1970s the banks were eager for relief By the 1980s Congress passed laws to deregulate several industries

The Savings and Loan Crises The S & L Crises was caused by: Deregulation High interest rates Bad loans fraud

Recent Trends Growing trend of bank mergers More deregulation and more bank failures

Lesson 1 Bookwork Define vocab on page 250 Example: 1. Bank – define…

Lesson 2 – Banking Today

Lesson 2 Focus Banking has changed greatly in recent decades Today, many people are likely to use credit or debit cards instead of cash or checks. Banks provide a large array of services, and electronic banking is revolutionizing the way people conduct banking transactions

Lesson 2 Vocab Money supply Liquidity Demand deposit Money market mutual fund Fractional reserve banking Default Mortgage Credit card Interest Principal Debit card creditor

Measuring the Money Supply Money consists of: Currency Traveler’s checks Checking account deposits Variety of other items All of these items make up the money supply all the money available in the U.S. economy

M1 – page 259 figure 10.5 M1 represents money that people can access easily and immediately use to pay for goods and services M1 assets have liquidity, or the ability to be used as or directly converted into cash 48% of M1 is cash held outside of banks

M2 – page 259 figure 10.5 M2 = M1 plus several other categories M2 assets are near money since they can not be directly turned into cash Deposits in savings Money market mutual funds – a fund that pools money from small savers to purchase govt and corporate securities

Functions of Financial Institutions Storing Money Saving Money Loans Mortgages Credit Cards Simple and Compound Interest Banks and Profit

Storing Money Safe, convenient place to store your money Cash kept in fireproof vaults Insured against robbery

Saving Money Savings accounts Checking accounts Money market accounts Certificates of deposit (CDs)

Loans Banks provide people with loans They loan out a % of their patrons deposits to other people They make interest off the loans Default – when borrowers fail to pay back their loans Fractional reserve banking – page 260 figure 10.6

Mortgages Banks provide you with loans to buy a house

Credit Cards Banks provide you with credit cards Remember credit cards are not debit cards

Simple and Compound Interest Interest – the price paid for the use of borrowed money Principal – the amount borrowed in a loan Page 261 figure 10.7

Banks and Profit Banks are in business to make a profit Page 262 figure 10.8

Types of Financial Institutions Commercial Banks Savings and Loan Associations Savings Banks Credit Unions Finance Companies

Commercial Banks Your everyday neighborhood bank They provide the most services and play the largest role in the economy of any type of bank

Saving and Loans Popular during the 1800s Today they provide many of the same services as commercial banks

Savings Banks Started in the 1800s Would make smaller deposits than commercial banks wished to handle

Credit Unions Cooperative lending associations for particular groups like employees of a specific firm or government Provide many of the same services as commercial banks but at better rates for their members National Credit Union Administration (NCUA)

Finance Companies A place to also go to get home loans, car loans etc etc

Electronic Banking ATM’s Debit Cards Home Banking Automatic Clearing House Stored Value Cards

Automated Teller Machines Automated way of withdrawing cash from your accounts

Debit Cards Used to withdraw money directly from your account Need a pin NOT a credit card

Home Banking On-line banking

Automatic Clearing Houses Allows consumers to pay bills without writing checks Available at Federal Reserve Banks and their branches

Stored Value Cards Examples?

Banks and Banking Review Page 266-267 Key Terms 1-8 write out and underline Reviewing Main Ideas 10-14 restate