Transcript Chapter 14 Money, Banking, and the Fed

Chapter 14
Money, Banking, and the Fed
Section 2
The Development of Modern Banking
Page 390
The Development of Banking in
America
• Privately Issued Bank Notes
– After the Revolution the people did not trust the
government to issue anything except coins
– Printing of paper currency was done by private
banks only until the Civil War.
– By 1811 there were about 100 State chartered
banks issuing their own currency
The Development of Banking in
America
• Currency problems
– Each bank issued own currency in different
sizes, colors, and denominations.
– Banks were tempted to issue more notes
than backed with silver or gold.
– Counterfeiting became a problem.
Civil War & Green Backs
• 1,600 Banks issuing more than 10,000 different
kinds of paper currency.
• Congress printed paper currency in 1861 declaring
it legal tender (fiat money that must be accepted
in payment for debts)
• Individuals referred to new paper notes as
“greenbacks.”
• The National Currency Act in 1863 created a
National Banking System (NBS).
The National Banking System
• A national bank issued its own notes called
national currency.
– This was backed with bonds banks
purchased from federal government.
– Government was engaged in bank
inspections.
– 10% tax applied to all privately issued bank
notes.
The National Banking System
• Gold certificates were issued. (paper currency
backed by gold placed on deposit with the
United States Treasury)
• Silver certificates were introduced
in 1878. (paper currency backed by silver
dollars and bullion placed in reserved with
the Treasury)
The Creation of the Fed
• By the 1900s, the National Banking System
was showing signs of strain.
– Difficulty in providing enough currency for
a growing nation
– System not designed for popular method of
paying—checking accounts
– Minor recessions caused major problems
for banks and lending institutions.
The Creation of the Fed
• Congress created the Federal Reserve System, or Fed,
as the nation’s central bank in 1913
– Membership required by all national banks
– State-chartered banks were eligible for
membership.
– Membership banks purchased stock in the Fed.
• The Fed issued its own currency, replacing all other
types of currency.
• Despite creation of the Fed, banking industry was
overextended when Great Depression began in 1929.
Banking in the Great Depression
• Banks did not have deposit insurance for
customers.
• Bank runs caused many banks to fail. (a rush by
depositors to withdraw their funds from a bank
before it failed.)
• Bank holiday—declared by President Roosevelt
March 5th, 1933 (a brief period during which every
bank in the country was required to close.
• Bu 1934, 10,000 banks had closed or merged with
stronger banks.
Banking in the Great Depression
• The Banking Act of 1933 (Glass-Steagall Act)
created the FDIC:
– Insures customer deposits to a maximum
specified amount if case of failure
– Provides sense of security
– Can seize banks and sell them if in danger
of collapse
Fractional Reserves and Deposit
Expansion
• Popularity of checking accounts led to reforms in
the use of fractional bank reserves.
• Fractional reserve system—banks are required to
keep only a portion of their total deposits in the
form of legal reserves.
• Size of reserve is determined by a reserve
requirement and is set aside in vault as cash or in a
member bank reserve (MBR).
• Remaining excess reserves represents the bank’s
lending power and can be loaned out.