Notes

Banking is an economic institution with a long history in the United States. Just after the
United States won independence, tensions between the Federalists, who wanted a
strong central government, and the Democratic-Republicans, who favored states’ rights,
culminated in a political battle over a national bank. In 1791, Congress voted in favor of
chartering the first Bank of the United States.
The country was on the verge of war in 1811, and President Madison feared the
consequences of losing the national bank. He spoke out in support of rechartering the
bank, but Congress voted not to renew the charter of the Bank of the United States,
thereby allowing the old charter to expire. In 1836, the charter of the second Bank of the
United States lapsed, and the bank was dismantled. Bank money was funneled into a
dozen or so smaller state banks called “pet banks.”The “free banking” era followed, during which time the number of state-chartered banks
tripled. Bank runs, panics, and fraud characterized the banking industry. All banks were
able to issue currency, so the value and denominations varied per bank, causing further
confusion.
During the Civil War, the Union and the Confederacy both needed money. The National
Banking Acts of 1863 and 1864 gave three powers to the federal government that
helped to stabilize the economy: the power to charter banks, the power to require banks to hold adequate gold and silver reserves, and the power to issue a single national
currency. Despite these new powers, currency was still unstable. In 1873, the U.S.
passed the Coinage Act, which made gold the only metallic standard in the United
States. The government was prohibited from printing money without the gold to back it,
further securing the value of paper currency.
Although the U.S. had a single national currency that was backed by the gold standard,
it still lacked a central banking authority. The 1913 Federal Reserve Act established the
Federal Reserve System, or the Fed, as the central bank of the United States.
In October of 1929, the U.S. stock market crashed, and people tried to rapidly sell off
their devalued stocks. Within days, nearly forty billion dollars disappeared, causing
panic and ruin. By 1932, 5,000 banks faced bankruptcy. In response, President Franklin
D. Roosevelt helped create the Federal Deposit Insurance Corporation, or FDIC, in
1933. The FDIC insured bank deposits up to a certain amount, and the nation slowly
moved away from the gold standard.
Since the Great Depression, banks have been closely regulated by the government.
Interest rates and loans are under certain government regulations. But in the late 1970s,
the government began to remove some of the regulations. This deregulation
dramatically affected savings and loans banks, causing several to fail, which also
affected the federal agency that insured them, the FDIC. For the past thirty years, several medium-sized banks merged to become the large
banks of today, like Citigroup and Bank of America. Smaller banks and credit unions
also entered the industry. Despite this, the banking industry still faces challenges such
as the 2008 recession that was prompted in large part by thousands of risky, inflated
mortgage loans made by banks across the country.