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DEVELOPMENT OF THE U.S. BANKING SYSTEM

2.12.1 Creation of a National Currency2.22.2 Banking Before 19132.32.3 Modern Banking

22

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WHAT IS CURRENCY?WHAT IS CURRENCY?WHAT IS CURRENCY?WHAT IS CURRENCY?

Medium of exchangeSomething people use to trade things of valueAnything from grain to metal to money

CurrencyAll media of exchange circulating in a country

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CLASSIFYING CURRENCYCLASSIFYING CURRENCYCLASSIFYING CURRENCYCLASSIFYING CURRENCY

Metallic currency Paper currencyGovernment currency Bank currencyDeposit currency

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SHIFTING MEANINGSSHIFTING MEANINGSSHIFTING MEANINGSSHIFTING 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 warThe idea of currency took on the broader sense

used today.

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THE GROWTH OF AMERICAN THE GROWTH OF AMERICAN CURRENCYCURRENCYTHE GROWTH OF AMERICAN THE GROWTH OF AMERICAN CURRENCYCURRENCY

Colonial cashEnglish pounds and shillingsReal

A Spanish dollarPaper money

English or foreign bank notesPaper money issued by the Continental Congress

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CURRENCY IN THE UNITED STATESCURRENCY IN THE UNITED STATESCURRENCY IN THE UNITED STATESCURRENCY IN THE UNITED STATES

1792 Mint Act authorizes coins

1794 U.S. mint begins operation

1864 National Banking Act Established standardsTaxed state bank notes

1913 Federal Reserve Act establishes banking system of today

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MORE THAN A MEDIUM OF MORE THAN A MEDIUM OF EXCHANGEEXCHANGEMORE THAN A MEDIUM OF MORE THAN A MEDIUM OF EXCHANGEEXCHANGE

Currency does more than serve as a medium of exchange.Can provide recognition for individuals or events that

are of national historical significanceQuarters commemorating each of the 50 states were

issued between 1998 and 2008.

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2.2

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.

GOALSGOALS

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BANKS IN THE YOUNG UNITED BANKS IN THE YOUNG UNITED STATESSTATESBANKS IN THE YOUNG UNITED BANKS IN THE YOUNG UNITED STATESSTATES

The First Bank of the United States Duration of charter

1791-1811Ownership

80% held by private investors and foreign governments20% held by U.S. government

The Second Bank of the United States Duration of charter

1816-1836U.S. government owned

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STEPS TOWARD CENTRAL STEPS TOWARD CENTRAL BANKINGBANKINGSTEPS TOWARD CENTRAL STEPS TOWARD CENTRAL BANKINGBANKING

The National Banking Act of 1864Comptroller of the Currency

Issued charters to national banksIssued national bank notes

Federal Reserve ActIn 1913, created a system to stabilize the banking

system

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2.3

MODERN BANKING

Explain why Congress established the Federal Reserve System.Identify recent challenges faced by the banking system.

GOALSGOALS

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A TRUE NATIONAL BANKING A TRUE NATIONAL BANKING SYSTEMSYSTEMA TRUE NATIONAL BANKING A TRUE NATIONAL BANKING SYSTEMSYSTEM

ReservesPercentage of deposits that are set aside to help

with liquidity dropsReserve liquidity

Ways to convert the reserves readily into cash

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THE FEDERAL RESERVE ACT OF THE FEDERAL RESERVE ACT OF 19131913THE FEDERAL RESERVE ACT OF THE FEDERAL RESERVE ACT OF 19131913

Central banking systemFlexible and adaptable

Board of directorsControlled district reserve banks

Member banks could borrow money to meet demand

Monitored and protected entire banking system

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BANKS IN CRISISBANKS IN CRISISBANKS IN CRISISBANKS IN CRISIS

Great Depression (1929-1939)Worst economic crisis of Western industrialized nations

through the end of the twentieth centuryMargin

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 runWhen many people try to withdraw their money at once

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THE BANKING ACTS OF 1933 AND THE BANKING ACTS OF 1933 AND 19351935THE BANKING ACTS OF 1933 AND THE BANKING ACTS OF 1933 AND 19351935

Glass-Steagall ActSeparated commercial banking from investment

bankingRequired bank holding companies to be examined

by the Federal Reserve BoardFederal Deposit Insurance Corporation (FDIC)

Guarantees deposits against bank failuresBanking Act of 1935

Expanded the monetary controls of the Federal Reserve Board

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RECENT BANKINGRECENT BANKINGRECENT BANKINGRECENT BANKING

Inflation and BankingInflation

A rise in general pricesStagflation

A combination of a stagnant economy, high inflation, and high unemployment

RecessionA decline in total production lasting a minimum of two

consecutive quarters

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DEREGULATIONDEREGULATIONDEREGULATIONDEREGULATION

Early 1980sLaws passed to let banks compete with other

financial firmsMid 1980s

Government intervention to assist failed S&LsMid 2007

Mortgage crisisEmergency Economic Stabilization Act of 2008

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THE REVOLUTION CONTINUESTHE REVOLUTION CONTINUESTHE REVOLUTION CONTINUESTHE REVOLUTION CONTINUES

The Federal Reserve dropped interest rates multiple timesTo stimulate the economy

Check21Mortgage crisisCredit crisisFederal intervention to rescue large financial

institutions on the brink of failure