Banking Systems, 2e © Cengage/South-Western Slide 1 DEVELOPMENT OF THE U.S. BANKING SYSTEM Creation of a National Currency Banking Before Modern Banking 2

Banking Systems, 2e © Cengage Learning/South-Western Slide 2 WHAT IS CURRENCY? Medium of exchange Something people use to trade things of value Anything from grain to metal to money Currency All media of exchange circulating in a country

Banking Systems, 2e © Cengage Learning/South-Western Slide 3 CLASSIFYING CURRENCY Metallic currency Paper currency Government currency Bank currency Deposit currency

Banking Systems, 2e © Cengage Learning/South-Western Slide 4 SHIFTING MEANINGS Before World War I Many countries had governments that did not issue paper money. Paper currency meant only notes issued by large banks. In the United States, currency meant the money that the government printed. After the war The idea of currency took on the broader sense used today.

Banking Systems, 2e © Cengage Learning/South-Western Slide 5 THE GROWTH OF AMERICAN CURRENCY Colonial cash English pounds and shillings Real A Spanish dollar Paper money English or foreign bank notes Paper money issued by the Continental Congress

Banking Systems, 2e © Cengage Learning/South-Western Slide 6 CURRENCY IN THE UNITED STATES 1792 Mint Act authorizes coins 1794 U.S. mint begins operation 1864 National Banking Act Established standards Taxed state bank notes 1913 Federal Reserve Act establishes banking system of today

Banking Systems, 2e © Cengage Learning/South-Western Slide 7

Banking Systems, 2e © Cengage Learning/South-Western Slide 8 MORE THAN A MEDIUM OF EXCHANGE Currency does more than serve as a medium of exchange. Can provide recognition for individuals or events that are of national historical significance Quarters commemorating each of the 50 states were issued between 1998 and 2008.

Banking Systems, 2e © Cengage/South-Western Slide BANKING BEFORE 1913 Identify the reasons for the establishment and expiration of both the First and Second Banks of the United States. Describe the continuing problems that led to the Federal Reserve Act. GOALS

Banking Systems, 2e © Cengage Learning/South-Western Slide 10 BANKS IN THE YOUNG UNITED STATES The First Bank of the United States Duration of charter Ownership 80% held by private investors and foreign governments 20% held by U.S. government The Second Bank of the United States Duration of charter U.S. government owned

Banking Systems, 2e © Cengage Learning/South-Western Slide 11 STEPS TOWARD CENTRAL BANKING The National Banking Act of 1864 Comptroller of the Currency Issued charters to national banks Issued national bank notes Federal Reserve Act In 1913, created a system to stabilize the banking system

Banking Systems, 2e © Cengage/South-Western Slide MODERN BANKING Explain why Congress established the Federal Reserve System. Identify recent challenges faced by the banking system. GOALS

Banking Systems, 2e © Cengage Learning/South-Western Slide 13 A TRUE NATIONAL BANKING SYSTEM Reserves Percentage of deposits that are set aside to help with liquidity drops Reserve liquidity Ways to convert the reserves readily into cash

Banking Systems, 2e © Cengage Learning/South-Western Slide 14 THE FEDERAL RESERVE ACT OF 1913 Central banking system Flexible and adaptable Board of directors Controlled district reserve banks Member banks could borrow money to meet demand Monitored and protected entire banking system

Banking Systems, 2e © Cengage Learning/South-Western Slide 15 BANKS IN CRISIS Great Depression ( ) Worst economic crisis of Western industrialized nations through the end of the twentieth century Margin Buying a stock for a fraction of its price and then reselling it for a profit Full purchase price of stock is not paid Bank run When many people try to withdraw their money at once

Banking Systems, 2e © Cengage Learning/South-Western Slide 16 THE BANKING ACTS OF 1933 AND 1935 Glass-Steagall Act Separated commercial banking from investment banking Required bank holding companies to be examined by the Federal Reserve Board Federal Deposit Insurance Corporation (FDIC) Guarantees deposits against bank failures Banking Act of 1935 Expanded the monetary controls of the Federal Reserve Board

Banking Systems, 2e © Cengage Learning/South-Western Slide 17 RECENT BANKING Inflation and Banking Inflation A rise in general prices Stagflation A combination of a stagnant economy, high inflation, and high unemployment Recession A decline in total production lasting a minimum of two consecutive quarters

Banking Systems, 2e © Cengage Learning/South-Western Slide 18 DEREGULATIONDEREGULATION Early 1980s Laws passed to let banks compete with other financial firms Mid 1980s Government intervention to assist failed S&Ls Mid 2007 Mortgage crisis Emergency Economic Stabilization Act of 2008

Banking Systems, 2e © Cengage Learning/South-Western Slide 19 THE REVOLUTION CONTINUES The Federal Reserve dropped interest rates multiple times To stimulate the economy Check21 Mortgage crisis Credit crisis Federal intervention to rescue large financial institutions on the brink of failure