Banking In The : 1791 to 2012 Spring, 2013 First 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 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 were state banks

• Banks issued their own paper currency

• Banks were susceptible to bank runs 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 notes

• US returned to a gold standard in 1873, angering “silverites”

• Use of silver for coins eliminated

• Economic crises: Panic of 1873, Panic of 1893

• 1900: Congress passes , formally placing US on gold standard Banks in the 20th Century

• Continued economic instability

• The nation needed a central decision-making institution

• The Act

• Created Federal Reserve Notes

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

• Banks can borrow on short- term basis from the Fed “Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence....The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit”

Franklin Delano Roosevelt 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

• Set by the Fed in -- repealed in 1980

• Goal was to allow them to increase profits

• Bank runs began in 1985

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

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

• Unsound real estate lending; government spent billions

• Moral hazard: a tendency to take risks because the costs are borne by a different party Modern History of United States Banks What Caused The Financial Crisis? 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 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

• (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)