DEVELOPMENT OF U.S. BANKING

Lesson 2 DEVELOPMENTOF U.S. BANKING 2.1 Creation of a National Currency 2.2 Banking Before 1913 2.3 Banking in the Twentieth Century 2.4 The Federal Reserve System

Lesson 2.1CREATION OF A NATIONAL CURRENCY Identify different types of currency Explain how currency evolved through the early days of the United States to what it is today GOALS

WHAT IS CURRENCY? • Money is a medium of exchange for people to use to trade things of value. • Most people associate the word “currency” with paper money. • Strictly speaking, currency is all media of exchange circulating in a country.

CLASSIFYING CURRENCY • Metallic currency—coins • Paper currency—paper money and credit instruments • Government currency—money printed by the government • Bank currency—bank notes issued against reserves • Deposit currency—checks

SHIFTING MEANINGS • Before World War I • Many countries had governments that did not issue paper money. In these countries, 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.

COLONIAL CASH • Some British-type coins were minted on American soil as early as the 1650s. • Foreign money was more common. • There was limited use of English pounds and shillings. • The Spanish dollar called the real was the most popular.

CURRENCY IN THE UNITED STATES • 1792 Mint Act authorizes coins. • 1794 U.S. mint begins operation. • 1794–1830s Both foreign and U.S. coins in circulation. • 1863–1864 National Currency Act and National Banking Act establish standards and tax state bank notes. • 1864–1913 Problems with money supply persist. • 1913 Federal Reserve Act establishes banking system of today.

Lesson 2.2BANKING 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

THE FIRST BANK OF THE UNITED STATES • Chartered in 1791 • Privately held with the U.S. government owning about 20% • Performed functions of a central bank • Charter expired in 1811

THE SECOND BANK OF THE UNITED STATES • Chartered in 1816 for twenty years • Regulated credit and the money supply at the expense of state banks • Was weakened by opposition from President Andrew Jackson and the withdrawal of government funds • Died when its charter expired in 1836

STEPS TOWARD CENTRAL BANKING • State banks • Private banks • The Independent Treasury System

THE NATIONAL BANKING ACT OF 1864 • Enacted to stabilize the banking system • Established the office of the Comptroller of the Currency to issue charters to national banks • Helped establish a national currency • Did not provide for ongoing monitoring and regulation of the credit and money supply • Did not guarantee the safety of banks

Lesson 2.3BANKING IN THE TWENTIETH CENTURY Explain why Congress established the Federal Reserve System Identify challenges that the banking system of the United State faced in the twentieth century GOALS

THE FEDERAL RESERVE ACT OF 1913 • Federal Reserve Act in 1913 founded a system of central banking that was both adaptable and flexible. • A board of directors controlled district reserve banks. • The original Federal Reserve Board • Secretary of the Treasury • Comptroller of the Currency • Presidential appointees with ten-year terms

BANKS IN CRISIS • The stock market crash in October 1929 • The Great Depression • Buying stock on margin • Bank runs

The Emergency Banking Act of 1933 • Also called the Glass-Steagall Act • Separated commercial banking from investment banking to protect assets • Required bank holding companies to be examined by the Federal Reserve • Established the Federal Deposit Insurance Corporation (FDIC)

The Banking Act of 1935 • Expanded the monetary controls of the Federal Reserve • Changed the structure of the Federal Reserve Board • Removed the Secretary of the Treasury and Comptroller of the Currency • Lengthened terms of board members

MODERN BANKING • Basic banking system remained unchanged for the rest of the twentieth century. • Federal Reserve and its chairmen became more independent. • Inflation, recession, and modernization have changed banking dramatically.

INFLATION AND BANKING • Inflation is a collective rise in the supply of money, incomes, and prices. • Stagflation is a combination of a stagnant economy and high inflation.

DEREGULATION • Laws were passed in the early 1980s to let banks compete more freely with other financial firms, opening doors to the services available today. • Many savings and loan institutions (S&Ls) took advantage of new regulations to invest in commercial real estate and speculative loans. • These S&Ls failed during the recession of the mid-1980s. • When the Federal Savings and Loan Insurance Corporation (FSLIC) could not cover all the losses, the government stepped in.

THE REVOLUTION CONTINUES • The basic structure of the banking system remains essentially as it was in 1913. • The business of banking, with its rapid communication, its global information exchange, and its marketing focus, little resembles the banking industry of an earlier age.

Lesson 2.4THE FEDERAL RESERVE SYSTEM Identify the organization of the Federal Reserve system Explain how the Federal Reserve influences banks and the economy GOALS

Chairman Board of Governors District Reserve Banks Member Banks STRUCTURE OF THE FED

FUNCTIONS OF THE FED • Act as government’s bank • Act as the bank’s bank • Monitor bank operations • Establish and affect monetary policy

THE GOVERNMENT’S BANK • Tax payments go to accounts in Federal Reserve banks. • Government makes payments from these accounts. • Federal Reserve is responsible for selling and redeeming various government securities.

THE BANKS’ BANK • Serves as a reserve bank for other banks • Processes payments between banks

BANK SUPERVISION • Conducts bank examinations • Supervises international banks • Protects consumers

MONETARY POLICY • Open market operations • Setting reserve requirements • Adjusting the discount interest rate

DEVELOPMENT OF U.S. BANKING