1. Section 2: The Development of US Banking
Money and Banking
Section 2: The Development of US Banking

2. Objectives Describe how banking developed in the United States
Identify the banking institutions that operate in the United States

3. Development of US Banking
Origins
19th Century
20th Century
First bank of the US
Second bank of the US
Federal reserve system (1913), true central bank, national currency
Privately owned
Wildcat banking-state banks, little regulation, multiple currencies
National bank
Tight regulation begins during the Great Depression, FDIC protects depositors
Helped control currency
1860s-greenbacks, system of national banks, currency backed by US bonds
Opposed by Antifederalists
Deregulation contributes to S&L crisis in 1980
1900-gold standard

4. Origins of Banking Modern banking arose in Italy
People would store valuables at the bank
Fractional Reserve Banking
Practice of holding only a fraction of the money deposited in the bank and lending the rest

5. Alexander Hamilton Leading Federalist
Proposed chartering a privately owned national bank to put the government on a sound financial footing
Bank issue national currency and help control the money supply

6. Colonial American Banks
Similar practices as Italy
Not nearly as secure
If merchant’s business failed
Lost all of their deposits/savings
After Revolutionary War many state banks were established
(State Banks) banks chartered or licensed, by state governments were established
Issue of instability and disorder
Currency lent out was not necessarily linked to reserves of gold or silver held by the bank

7. First Bank of the US Hamilton proposed national bank
“Men often oppose a thing merely because they have had no agency in planning it, or because it may have been planned by those whom they dislike.”
-Hamilton
First Bank of the US
Hamilton proposed national bank
Bank issue a national currency
Help control money supply by refusing to accept currency not backed by gold of silver
Lend money to federal government, state banks, and businesses
First national bank chartered in 1791
Achieved financial goals set by Hamilton
Opponents claimed bank policies restricted economic growth
Congress refused to renew charter in 1811

8. Questions
How did Italian merchants begin the practice of fractional reserve banking?
They lent money that was deposited with them because not all deposits were reclaimed at once
Why was currency that not backed by gold or silver a cause of financial instability?
There was nothing to give the money value

9. Without a central bank…
Government encountered issues funding the War of 1812
State banks soon returned to issuing currency not backed by gold or silver
Increase in money supply led to inflation

10. 19th Century Developments
Second bank of US chartered in 1816
Greater financial resources
Made money supply more stable
President Andrew Jackson vetoed renewal of its charter in 1832
Wildcat Banking
No federal oversight of bank industry
State banks issued its own paper currency bank notes
Passed free banking laws
Banks located in remote areas to discourage people from redeeming bank notes
Remote locations and questionable quality of bank notes= wildcat banks
Bank run financial panics and economic instability

11. 19th century-Struggle for Stability
Difficult to finance its operations during Civil War without national currency and a federal bank
1st solution issue a new currency backed by government bonds
Greenbacks US Bank notes printed with green ink
1863, National Banking Act, provided for a national currency backed by US Treasury bonds and regulated the minimum amount of capital required for national banks as well as the amount of reserves to back the currency
National banks, banks chartered by the national government
1900, adoption of gold standard
National currency and gold standard brought stability to banking system
Money was now uniform, backed by something of intrinsic value, and limited by the supply of gold

12. Question:
How did the National Bank Act of 1863 attempt to eliminate the problems caused by wildcat banking
It set strict standards for national banks and provided for a national currency backed by government bonds to replace the state bank notes

13. Activity Wildcat Banking
Students will be placed into 3 groups representing bankers, businesses, and consumers.
Each group will discuss the ways banking practices in the era of wildcat banking affected them
WRITE THEM DOWN
Each banker needs to create currency using colored paper or a design with the name of the bank on it
Also list some rules for the customers
Students will role-play scenarios showing how banks caused difficulties for businesses and consumers (problems with acceptability, redemption –decline in value of bank notes- and bank runs
Discuss how the role-plays showed the problems with wildcat banking

14. Rubric Points Wildcat Banking Presentation of Information 4 Excellent
Clear and creative 3
Good
Mostly clear and creative 2
Fair
Sometimes clear and creative 1
Poor
Sketchy

15. 20th Century Developments
Combination of national banks and a national currency linked to the gold standard initially brought stability
Still suffered from periods of inflation, recession, and financial panic
Economic instability due to lack of a central decision making institution that could manage the money supply in a flexible way to meet the needs of a changing economy

16. A New Central Bank
1913, Congress passed the Federal Reserve Act established the Federal Reserve System (central bank)
Provides financial services to the federal government
Makes loans to banks that serve the public
Issue Federal Reserve notes as the national currency
Regulates money supply to ensure that money retains its purchasing power

17. The Great Depression and New Deal
Banks failed due to bank runs
FDR New Deal
Banking Act of 1933, instituted reforms such as regulating interest rates that banks could pay and prohibiting banks from selling stocks
FDIC provided federal insurance so that if a bank failed, people would no longer lose their money
Ultimately this increased the regulation of banking in the US

18. Deregulation and S&L Crisis
1980 and 1982 Congress passed laws that lifted government limits on savings interest rates
S&Ls able to operate like commercial banks
Deregulation encouraged S&Ls to take more risks in the types of loans they made
S&Ls failed and lost depositor’s money
Congress agreed to fund S&L industry’s restructuring came out of taxpayer’s pockets

19. Question
How are the First Bank of the United States and the Federal Reserve different?
First Bank single bank with no direct control of state banks and their currency
Federal Reserve system of regional banks, which issues the only legal currency

20. Financial Institutions in the US
Bank refers to financial institutions
Ultimately it is a business there to earn a profit
Government regulates…
How much money the owner of a bank will invest
The size of the reserves a bank holds
The ways that loans may be made

21. Commercial Banks Oldest form of banking privately owned
Initially established to provide loans to businesses
All national commercial banks belong to the Federal Reserve System
16% of State-chartered banks join the FDIC

22. Savings Institutions
Savings and Loan associations began in the US in the 1830s
Originally chartered by individual states as mutual societies for 2 reasons:
1. to take savings deposits
2. to provide home mortgage loans
Also provide other services like commercial banks
Many savings institutions financed through the sale of stock
Insured under a specific fund of the FDIC as part of the reforms that followed the S&L crisis of the 1980s

23. Credit Unions
Credit Unions are cooperative savings and lending institutions (more like early S&Ls)
Offer savings and checking accounts, but specialize in mortgages and auto loans
First credit union chartered in 1909
Federal Credit Union Act of 1934 created a system of federally chartered credit unions
Major difference between credit union and other financial institutions…
Membership requirements
Cooperative, nonprofit organizations owned by and operated for members

24. Question
Which type of bank described above has the largest percentage of its institutions chartered by the federal government? Why might this solution have developed?
Credit Unions, 61%
Credit Unions had a shorter history of being chartered by states before the Federal Credit Union Act passed in 1934