HistoryofTheU.S.FederalBankingSystem

IsabelWiseandMattGilbaugh

Question

• DoesanyoneknowwhatthefirstcommercialbankontheU.S.was?

BankofPennsylvania

• FirstcommercialbankintheU.S.• Foundedin1780• FoundedinordertocoverthedebtsincurredasaresultoftheRevolutionaryWar

• Stockholdersanddirectorswerepolitically,financially,andsociallyprominentmen

AlexanderHamilton• NotedasafoundingfatheroftheU.S.bankingsystem

• Supportedthecolonies’fightforindependencefromBritain

• Servedasanaidetothecolonies’leadgeneral,GeorgeWashington

• Aspresident,GeorgeWashingtonnamedhimthefirstSecretaryofTreasury

FinancialIssuesaftertheRevolutionaryWar

• WarlefttheUnitedStatesinheavydebt• Moneywasessentiallyworthless• Hamiltonresearchedcentralbankingsystemsinothercountries,specificallyGreatBritain

• AnalyzedhowGreatBritainbankingsystemsupportedacountryatwar

Question

• DoesanyoneknowwhatthefirstbankoftheUnitedStateswascalled?

CreationofTheFirstBankoftheUS

• FoundedbyAlexanderHamiltonin1791• OpenedinPhiladelphiawitha20yearcharter• Beganwithcapitalizationof$10million• Governmentowned20%ofthestockandprivateinvestorsownedtheremaining80%

• Becamethelargestfinancialinstitutioninthecountry

FunctionsoftheFirstBank• Accepteddepositsfromthepublic• Madeloanstoprivatebusinessesandthegovernment

• Circulatednoteswhichbecameanimportantformofcurrency

• Collectedtaxrevenues• Madeloanstoandpaidthebillsofthegovernment

• Unlikecentralbanks,itdidnotofficiallycontrolthemonetarypolicyorstatebanks

• InternationalTradeimprovedwithnewcurrency

ScripBubbleof1791

• Whatisabankscrip?

ScripBubbleof1791• Whatisabankscrip?• Bankscrips representedtherighttopurchasestockintheFirstBankandwereinitiallysoldfor$25in1791

• Tocompleteownership,investorshadtolaterpay$100bi-annuallyin1792and$75in1793

• Onequarterofpaymenthadtobeintheformofgold,buttheremainingthree-quarterscouldbeintheformofbonds

• Because¾ofthepaymentcouldbemadeusingbonds,thepriceofbondsincreasedasinvestors’demandforbondsincreased

ScripBubbleof1791• Beganwiththebubbleofbankscrips inJuly1791• Onequarterofpaymenthadtobeintheformofgold,buttheremainingthree-quarterscouldbeintheformofbonds

• Bondsincreaseinprice• Thedesireforscrips increasedtheirprice,raisingthepricedramatically

• Priceseventuallycrashedbymid-Septemberandstabilized

Panicof1792

• “TheSixPercentClub”• Banksharepriceswentonarollercoaster,increasinganddecreasingfromOctobertoMarchof1792

• GeorgeClintonandhisfollowerswithdrewlargeamountsfromtheFirstBankinMarch1792

• Resultedinacreditshortage

Panicof1792• Sixpercentclubfailtomakepaymentsontheirloans

• WithoutthesebankerstopurchasesharesoftheFirstBank,thepriceofthestockdeclines

• April1792:DefaultingofthesixpercentclubandthepriceoftheFirstBankstockcollapsingproducesthepanic

• Response:bank’stightencredit,reducecashreserves,bank’sdeclinerenewalofloans

ClosingoftheFirstBank

• Charterexpiredin1811• In1811,Congressvetoedtherenewalbyonevote

• Therewasasecondvote,inwhichitwasalsovetoed

• Therefore,FirstBankoftheUnitedStatesclosedin1811

Warof1812

EconomicConsequencesoftheWarof1812

• Impededtrade,causedmanypricestoskyrocket

• Customdutiesonimportsdroppedduetoreducedtrading,decreasegovernmentrevenue

• Inflation• Severedebt

TheSecondBankoftheU.S.

• PresidentJamesMadisonsignedabillestablishingtheSecondBankoftheU.S.in1816

• OpenedinPhiladelphiainJanuary1817• 20yearcharter• $35Millionincapital• 20%Government,80%PrivateInvestors• 25Branches• FunctionedsimilarlytotheFirstBank

FinancialPanicof1819• Precursors…• ImportsandExportsaftertheWarof1812• Bankexpansion– Physically– Loans

• LandExpansion• Reductioninexports

FinancialPanicof1819• Contractionary Policy• Consequences– Foreclosures–Massdebt–Wageratingsdeclined– Unemployment

• Responses:landdebtrelief,speciereserveincrease,notecirculationdecrease

TheEndoftheSecondBank

• RequesttorenewthecharteroftheSecondBankwassenttoCongressinJanuary1832

• ThisbillpassedboththeHouseandSenate• PresidentJacksoneventuallyvetoedtherenewal

• EconomicConsequences:– BUSbanknoteswithdrawn,landtransferred

FinancialPanicof1837

• EconomicBoom:– Increaseinbusinesscorporations– Increaseinexportsandimports– Canals,roads,railroads– Landspeculation– Creditexpansion– Banksexpansion

FinancialPanicof1837

• EconomicBoom:– Increaseinbusinesscorporations– Increaseinexportsandimports– Canals,roads,railroads– Landspeculation– Creditexpansion– Banksexpansion

FinancialPanicof1837• SpecieCircularof1836• SpecieShortage• 1836-1837:CottonPricesFall• May1837:NYbanksrefusetotradespeciefornotes• BritishexportstotheUSdecreaseby60%• Panicensues…– Businessesfailed– Bankrunsoccur– Unemploymentrises– Farmersloseland– Paperfortuneswipedaway– Behaviorally,peopleseverelypanickedandsnowballedthecollapsingeconomy

TheNationalBankAct

• 1863:AbrahamLincolnproposedanewnationalbanksystem

• 1864:TheNationalBankActisapprovedbyCongress– Developanationalbanksystem– Createnationalcurrency– EstablishasecondarymarketforTreasurysecurities

PreludetotheFederalReserveAct

• Usuallylinkedtothepanicof1907– “Bankers’Panic”or“KnickerbockerCrisis”– NewYorkStockExchangefell50%YOY– Bankrunsandlackofliquidity

• Theneedforacentralbankingsystem• JacobSchiffChamberofCommercespeech

Aldrich-VreelandAct

• LedbySenatorNelsonAldrichafterthepanic• Providedemergencycurrencyduringcrises• FormedtheNationalMonetaryCommission• ConferenceatJekyllIslandClub• FinalreportpublishedonJanuary11,1911• RecommendationforNationalReserveBank

Glass-WillisProposal

• EstablishregionalFederalReservebanks• Createanational,elasticcurrency• Reservetherighttorediscountpapermoney• Institutesupervisionoverthebankingsystem• Improvethenationalpaymentsystem• Criticism

FederalReserveAct

• IntroducedintheHouseonAugust29th,1913andpassedonSeptember18th (287-85)

• PassedtheSenateonDecember18th,1913(54-34)

• SignedintolawbyPresidentWoodrowWilsononDecember23rd,1913

BuildingtheFed

• ReserveBankOrganizationCommittee:– SecretaryoftheTreasury:WilliamG.McAdoo– SecretaryofAgriculture:DavidF.Houston– ControlleroftheCurrency:JohnS.Williams

• Designatedamaxof12RegionalFedBanks• Dividedthenationintodistricts• Requiredparticipationfromallcharteredcommercialbanks

StructureoftheCentralBank

• Eachhaditsownbranches,directors,andboundaries

• FederalReserveBoard

– Boston– NewYork– Philadelphia– Cleveland– Richmond– Atlanta

– Chicago– St.Louis– Minneapolis– KansasCity– Dallas– SanFrancisco

• RegionalReserveBanklocations:

GreatDepression

• BankingPanicsof1930-1931• StockmarketcrashonOctober29,1929• Commercialbankcrisis– “Floating”checkscreatedfalsereserves– Immobilityinbankreserves

• ~8,000Fedmembers,~16,000non-members• BankofTennesseecollapseonNovember7th

• Ensuingbankfailuresandruns

FederalReserveReaction

• Responsevariedthroughouteachdistrict– SixthDistrictinAtlanta– EightDistrictinSt.Louis– CrisisinChicago

• Deflationandcashhoarding• BankingHolidayof1933• EmergencyBankingActof1933

BankingActof1933

• “Glass-SteagallAct”– Sen.CartGlassandRep.HenrySteagall

• SignedintolawonJune16,1933• MainProvisions:

1. CreationofFederalDepositInsuranceCorporation2. CreationoftheFederalOpenMarketCommittee3. Outlawandregulationofinterestspayments4. Regulated“speculation”ofbankcredit

BankingActof1935

• SignedintolawonAugust19,1935• TitleI:– FDICamendments

• TitleII:– Amendmentsto“BoardofGovernors”andFOMC– Loanstomemberbanks

• TitleIII:– Technicalamendments

Humphrey-HawkinsActof1978

• FullEmploymentandBalancedGrowthAct• EstablishmentofFederalReservepolicygoals– DualMandate– Unemployment&Inflation

• ScrutinyoftheFedandChairmanVolcker• Theperiodof”GreatModeration”

Recessionof1981-82

• FederalReserveinterestratehike• Highinflationandunemployment• FailureofS&Lassociationin’80s• PaulVolckerandtheFedpolicy• Persistingthreatofincreasinginflation

StockMarketCrashof1987

• Causesandcatalysts– Rapidgrowthofeconomycausedassetbubble– Governmentreportedtradedeficit– Financialderivatives

• Globalfinancialpanicon“BlackMonday”– Sharp22%decreaseintheDJIA

• FederalReserveResponse– ChairmanAlanGreenspan– Sourceofliquidityandsupport

2007-09FinancialCrisis

• Subprimemortgageandhousingcrisis• Effectsonthefinancialsector• FederalBailouts• BearStearnsacquiredbyJPMorganin2008• LehmanBrothersbankruptcy• BankofAmericaacquiredMerrillLynch

FedResponseto“GreatRecession”

• FedChairmanBenBernanke• “TooBigToFail”• Fed’ssupportofspecificinstitutions– AIG,Citigroup,BankofAmerica

• PrimaryDealerCreditFacility• Dodd-FranksignedintoeffectonJuly21,2010– StabilityoftheUSfinancialsystem– Increasedtransparencyofderivatives– FinancialStabilityOversightCouncil

ModernDutiesoftheFed

• Conductthenation’smonetarypolicy– Influencingmonetaryandcreditconditions– DualMandate

• Superviseandregulatebankinginstitutions• Maintainthestabilityofthefinancialsystem• Providefinancialservicesandplayroleinoperatingthenation’spaymentssystem

FedBoardofGovernors

1. JanetYellen(Chair)2. StanleyFischer(Vice-Chair)3. DanielTarullo4. JeromeH.Powell5. Lael Brainard6. Vacant7. Vacant

TheFedToday

• FederalFundsTargetRate:0.25%- 0.50%• NextFOMCMeetingonNovember1-2,2016– Lastincrease:25basispointsinDecemberof2015

• Potentialratehike?

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