Banking: How the System Evolved

With the Crash of 2008 and the melt down of our big financial institutions, questions have arisen as to how U.S. Banking evolved into what it is today.

While the Constitution did not expressly delegate the power to establish a federal bank, it clearly authorized Congress to coin money and to regulate its value. The Congress was also given the authority to make all laws “necessary and proper” to carry out those functions. In addition to a mint, George Washington opened the First Bank of the U.S. in 1791, which continued for 20 years, until their charter expired in 1811 due to non-renewal.

After the War of 1812, converting state bank notes into gold and silver became such a problem, Congress and James Madison were prompted into creating a 2nd Bank of the United States, in 1816. Andrew Jackson criticized it, saying it concentrated funds in the east, and limited local western banks from lending to farmers.

When Jackson became President, he was presented with a bill in 1832 to extend the charter of the 2nd U.S. Bank, but he vetoed it, arguing it was unconstitutional. He directed his Treasury Secretary to move all federal funds from the U.S. Bank into state banks, but his Treasury Secretary and his successor both refused, before the third in line finally carried out Jackson’s order.

As Jackson left office in 1837, newly-elected Martin Van Buren inherited the nation’s first serious depression. The crash came 36 days after he was sworn-in, as nearly every bank in the country closed. Van Buren tried to create a more stable system in 1840 by moving all federal funds from private banks into a U.S. Treasury.

As soon as President Tyler took over in 1841, he quickly reversed Van Buren’s policy, and vetoed two bills sponsored by Sen. Henry Clay to revive the U.S. Bank. President Polk, who followed Tyler in 1845, returned to Van Buren’s policy of keeping federal funds in the U.S. Treasury.

Before the Civil War, President Buchanan presided over an economic panic that witnessed the failure of several banks, and the volatility later continued, with additional panics under Grant in 1873, and Cleveland in 1893.

President Wilson signed the Federal Reserve Act in 1913, which created a new more stable system, by establishing 12 Federal Reserve Banks, charged with regulating the money supply, making loans to private banks, and by monitoring their reserves.

As President Franklin Roosevelt inherited the Great Depression, depositors started withdrawing their money from banks in 1933, triggering a panic that caused 5,000 of them to go out of business, the day before he was inaugurated. The new President promptly closed all banks, declared a Bank Holiday, and signed an Emergency Banking Act (1933) that established the Federal Deposit Insurance Corporation (FDIC) to make deposits safe by providing insurance for them. Congress also passed the Glass-Stiegel Act (1933) to take banks out of stock market speculation.

Ronald Reagan ushered in a new era of right-wing deregulation, during which he pushed the repeal of financial sector rules. As the conservatives beat the dumb louder and louder, they pressured moderates like Bill Clinton to repeal of the depression-era Glass-Stiegel Act. For eight years under George W. Bush, his minions looked the other way, as speculators took over the financial sector, and led us into the Crash of 2008.

To correct the problems caused by deregulation, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, as a first step in re-regulating the financial sector. That is how we got to where we are, but we are not there yet, and we have a ways to go to fully stabilize the system.