Slide 11

DEVELOPMENTOF U.S. BANKING

2.12.1 Creation of a National Currency2.22.2 Banking Before 19132.32.3 Banking in the Twentieth Century2.42.4 The Federal Reserve System

22

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Lesson 2.1

CREATION OF A NATIONAL CURRENCY

Identify different types of currencyExplain how currency evolved through the early days of the United States to what it is today

GOALSGOALS

Slide 33

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

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CLASSIFYING CURRENCYCLASSIFYING CURRENCYCLASSIFYING CURRENCYCLASSIFYING CURRENCY

Metallic currency—coinsPaper currency—paper money and credit

instrumentsGovernment currency—money printed by the

governmentBank currency—bank notes issued against

reservesDeposit currency—checks

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

used today.

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COLONIAL CASHCOLONIAL CASHCOLONIAL CASHCOLONIAL 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.

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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.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.

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Lesson 2.2

BANKING BEFORE 1913

Identify the reasons for the establishment and expiration of both the first and second Banks of the United StatesDescribe the continuing problems that led to the Federal Reserve Act

GOALSGOALS

Slide 99

THE FIRST BANK OF THE UNITED STATESTHE FIRST BANK OF THE UNITED STATESTHE FIRST BANK OF THE UNITED STATESTHE FIRST BANK OF THE UNITED STATES

Chartered in 1791Privately held with the U.S. government owning

about 20%Performed functions of a central bankCharter expired in 1811

Slide 1010

THE SECOND BANK OF THE UNITED STATESTHE SECOND BANK OF THE UNITED STATESTHE SECOND BANK OF THE UNITED STATESTHE SECOND BANK OF THE UNITED STATES

Chartered in 1816 for twenty yearsRegulated credit and the money supply at the

expense of state banksWas weakened by opposition from President

Andrew Jackson and the withdrawal of government funds

Died when its charter expired in 1836

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STEPS TOWARD CENTRAL BANKINGSTEPS TOWARD CENTRAL BANKINGSTEPS TOWARD CENTRAL BANKINGSTEPS TOWARD CENTRAL BANKING

State banksPrivate banksThe Independent Treasury System

Slide 1212

THE NATIONAL BANKING ACT OF 1864THE NATIONAL BANKING ACT OF 1864THE NATIONAL BANKING ACT OF 1864THE NATIONAL BANKING ACT OF 1864

Enacted to stabilize the banking systemEstablished the office of the Comptroller of the

Currency to issue charters to national banksHelped establish a national currencyDid not provide for ongoing monitoring and

regulation of the credit and money supplyDid not guarantee the safety of banks

Slide 1313

Lesson 2.3

BANKING IN THE TWENTIETH CENTURY

Explain why Congress established the Federal Reserve SystemIdentify challenges that the banking system of the United State faced in the twentieth century

GOALSGOALS

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THE FEDERAL RESERVE ACT OF 1913THE FEDERAL RESERVE ACT OF 1913THE FEDERAL RESERVE ACT OF 1913THE 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 BoardSecretary of the TreasuryComptroller of the CurrencyPresidential appointees with ten-year terms

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BANKS IN CRISISBANKS IN CRISISBANKS IN CRISISBANKS IN CRISIS

The stock market crash in October 1929The Great DepressionBuying stock on marginBank runs

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The Emergency Banking Act of 1933 The Emergency Banking Act of 1933 The Emergency Banking Act of 1933 The Emergency Banking Act of 1933

Also called the Glass-Steagall Act Separated commercial banking from investment

banking to protect assetsRequired bank holding companies to be

examined by the Federal ReserveEstablished the Federal Deposit Insurance

Corporation (FDIC)

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The Banking Act of 1935The Banking Act of 1935The Banking Act of 1935The Banking Act of 1935

Expanded the monetary controls of the Federal Reserve

Changed the structure of the Federal Reserve BoardRemoved the Secretary of the Treasury and

Comptroller of the CurrencyLengthened terms of board members

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MODERN BANKINGMODERN BANKINGMODERN BANKINGMODERN 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.

Slide 1919

INFLATION AND BANKINGINFLATION AND BANKINGINFLATION AND BANKINGINFLATION 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.

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DEREGULATIONDEREGULATIONDEREGULATIONDEREGULATION

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.

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THE REVOLUTION CONTINUESTHE REVOLUTION CONTINUESTHE REVOLUTION CONTINUESTHE 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.

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Lesson 2.4

THE FEDERAL RESERVE SYSTEM

Identify the organization of the Federal Reserve systemExplain how the Federal Reserve influences banks and the economy

GOALSGOALS

Slide 2323

Board of Governors

STRUCTURE OF THE FEDSTRUCTURE OF THE FEDSTRUCTURE OF THE FEDSTRUCTURE OF THE FED

Member Banks

District Reserve Banks

Chairman

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FUNCTIONS OF THE FEDFUNCTIONS OF THE FEDFUNCTIONS OF THE FEDFUNCTIONS OF THE FED

Act as government’s bankAct as the bank’s bankMonitor bank operationsEstablish and affect monetary policy

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THE GOVERNMENT’S BANKTHE GOVERNMENT’S BANKTHE GOVERNMENT’S BANKTHE 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.

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THE BANKS’ BANKTHE BANKS’ BANKTHE BANKS’ BANKTHE BANKS’ BANK

Serves as a reserve bank for other banksProcesses payments between banks

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BANK SUPERVISIONBANK SUPERVISIONBANK SUPERVISIONBANK SUPERVISION

Conducts bank examinationsSupervises international banksProtects consumers

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MONETARY POLICYMONETARY POLICYMONETARY POLICYMONETARY POLICY

Open market operationsSetting reserve requirementsAdjusting the discount interest rate