Chapter 10 Section 2

 Banks were informal, managed by merchants along with their regular trade  Would keep customer money for them for a small fee  Not that safe  After American Revolution- people wanted to establish a safe, stable banking system  Would help promote trade with other countries and growth in economy

 Debate on banking was part of the debate on the role of government in the country  Federalist- wanted a central bank, Hamilton proposed a national bank  National bank: issue a single currency, manage federal government’s funds, and monitor other banks  Antifederalists: wanted a decentralized banking system- states establish and regulate all banks within their borders

 Bank of the United States is established with a 20 year charter, had the following purposes: 1. Hold the money collected in taxes 2. Help carry out power to tax, borrow money in the public interest, regulate interstate and foreign commerce 3. Issue bank notes 4. Ensure state-banks held enough gold and silver to exchange for bank notes

 Antifederalist argued that it was unconstitutional, because the Constitution never addressed the issue of a bank  People feared that the Bank would only work with the rich and not the everyday farmer or small business owner  The Bank functioned only until 1811  charter ran out

 Once the Bank’s charter expired, state banks issued bank notes that they could not back  Also created too many banks  leads to financial confusion  Prices rose rapidly

 Chartered in 1816, limited to a 20 year charter  Slowly rebuilt people’s confidence in a national banking system  Nicholas Biddle was the man behind restoring stability  Surprise visits to banks  forced some banks to close and the rest to limit the number of notes issued  1819: Supreme Court ruled the Bank as constitutional  President Jackson vetoed the renewal of the Bank in 1832

 : Free Banking or “Wildcat” Era, dominated by state-chartered banks  : number of state banks will triple  Problems arise: 1. Bank runs- larger number of people trying to redeem their money at one time 2. Wildcat banks- in areas not well settled, high rate of failure 3. Fraud- collected gold and silver, issue bank notes and then disappear 4. Different currencies- not the same value everywhere and people produced counterfeit money

 estimated 8,000 different banks circulating currency  Central government played no role in providing paper currency or regulating reserves  US Treasury issued first paper currency since the Continental to help fund the Civil War  given the nickname “greenbacks”  South- issues currency backed by cotton, Confederate economy will suffer and notes become worthless

 National Banking Acts of 1863 and 1864 were geared to restore confidence in paper currency  Federal government gets 3 important powers: 1. Power to charter banks 2. Power to require banks to hold adequate gold and silver reserves 3. Power to issue a single national currency

 1870s- nation adopted the gold standard- paper money is equal to a certain amount of gold  Two advantages: 1. Set a definite value for the dollar: 1 ounce of gold= about $20 2. Government was limited on how much money the could print, had to have enough gold to back the money

 Panic of 1907, banks lacked adequate reserves, showed a need for a central bank  Federal Reserve Act, 1913, established the Federal Reserve System  The Fed served as nation’s first true central bank  Federal banking system established

 12 regional Federal Reserve Banks- central bank for their districts  Member banks, banks that belonged to the Fed: stored some of their cash reserves at the Federal Reserve Bank in their district  Federal Reserve Board: appointed by the President, run all the Federal Reserve Banks  Short-term loans: member banks could borrow money to meet short- term demand  Federal reserve notes: currency we have today, allows the Fed the power to increase or decrease amount of money in circulation

 Banks loaned large sums to many high-risk businesses  Businesses and farmers couldn’t pay back loans  Stock market crash led to many people making bank runs  All of this led to 1000s of banks failing

 March 5, 1933: FDR declares a “bank holiday”- closed the nation’s banks  Sound banks reopened a few days later  FDIC is established- all customer money up to a certain amount is covered: then $2500, today- $100,000  Over time money went off the gold standard and became fiat money