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The Monetary System

History of the US Banking System


History of the US Banking System

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All right, It's time for a quick history lesson. Let's go through the history of the U. S. Banking system. Now, I want to note that you're probably not gonna see too much of this on the test. But it depends on the professor. Some of them like to focus on the historical aspect of things and you always want to be prepared for anything. So here we're going to go through the history of the banking system and some of the most important uh points in the timeline. So prior to 1864, this is about when the civil war ended, banks were printing their own notes. There was no uniform currency throughout the US each bank had its own dollars. And there was virtually no regulation. After 18 64 there were some regulations put in place and the federal government regulated national banks. There was finally a uniform currency. So there was one currency that was printed at all the banks, but there was still no central bank. And remember when we talk about central bank, there was no Fed yet. There was no Fed between 18 64 and 1913. Okay, so during this period from 18 64 to 1913, we're seeing that the money supply was not responsive to local fluctuations. What does that mean? That if one part of the nation needed more money or needed less money um or was oversupplied with money? Well there wasn't enough responsiveness because there was no centralized power related to the money supply. Okay. So when when a bank was had had a rumor that there was not enough money at the back, it would lead to a bank panic, and a bank run, right? And that's where all the consumers go to the bank and try and get their money out all at once, and there's not enough reserves because they're making loans and there's not enough reserves to pay anyone. So the bank becomes frozen, right? There's not enough money. So the bank panics when they ran out of money, and financial crises were occurring once to twice per decade. So that's pretty often that there's these big banking failures happening during this period. It all led up to a big panic in 1907, and this was related to trust funds. So there were trust that were basically what a trust does is it manages deposits for wealthy clients. Okay. And it's still pretty much that way, um and they have generally like inheritances or an estate of a, of a wealthy client, they're they're going to manage those, those funds in those, in those inheritances or estates generally. So, these trust are supposed to maintain the wealth through low risk investments. Okay. And guess what? They're gonna not be making low risk investments during this panic. So, the difference between the trust that the bank was that a trust was less regulated. They didn't have the same reserve requirements. Right? So they were able to take a lot more of the deposits in the trust and put them into investments, and they had lower reserves. Okay, so, an economic boom during this period, um, the Trust started to begin speculating and speculating means taking riskier investments into real estate and stock, They were trying to get bigger returns for their stockholders, and these were not low risk investments like they were supposed to take. So, as, as the economy began to turn, the Trust suffered massive losses from these speculative investments, which lead to panics in the investors. The investors all wanted to take their funds out of the trust because they didn't want to lose all of their money. So, these bank panics occurred, the credit markets froze, the stock market crashed. We had all of these problems in the economy. And luckily one man, Jpmorgan bailed out, literally bailed out the entire economy. He stepped in and stopped the panic by loaning reserves, the banks. So this guy came in and he said, look, I know everyone's in a panic out loan you the money in the short term to get to stabilize the economy. That's pretty crazy that one man was able to do that. So, after this panic in 19 oh seven, there was the creation of the Federal Reserve. This is when we finally had enough, and we said, we need a central bank in the United States, right? This is the Central Bank that controls the money supply. Okay. And um, everything seemed to be going okay until the Great Depression happened. And there's a lot of uh economists believe that the Federal Reserve didn't make the right moves during the Great Depression. Um but in general, we're just gonna kind of keep it pretty short here. We're going to say that in the Great Depression basically was caused by plunging commodity prices leading to bank runs in the 1930s. Okay, so plunging commodity prices. When I say commodities, this is generally agricultural products, uh the farmers all of their products were starting to lose value and they wanted to get their money out of the banks. Okay, So these bank runs lead uh into a deeper and deeper recession. The there was no intervention made that that would help stop the Depression and it just got deeper and deeper. Finally, in 1933 there was passed the Glass Steagall Act, which created the F. D. I. C. If you've ever been to your bank and you go to the withdrawal window, you'll see a posting about the F. D. I. C. This is federal deposit insurance, Okay? And what this does is it ensures your bank deposits up to a certain amount. So, say that there's a situation where you need to get the money out of the bank, but they don't have it available. Well, the government ensures up to a certain amount right now, it's about $250,000 that they ensure that if the bank doesn't have the money to give it to you, the government is going to pay you that money within a few days. Okay. So if the bank runs out of money, it's it's it'll be reimbursed by the government. So to try and stop these bank panics of people going and trying to get their money out of the bank. This insurance says, hey don't worry if the bank doesn't have the money we're gonna pay you, so you don't have to rush to the bank. Alright. One other thing, the glass Steagall act did was it separated banks into two categories Commercial banks and investment banks. So commercial banks are depository banks, kind of what you're used to like uh where you go make your checking account, right checking accounts and these banks are F. D. I. C. Insured. Okay. So that that insurance on the deposits. Well they're safe at these commercial banks where you have a checking account, it'll be safe up to a certain amount. However, investment banks is a different category they create and trade financial assets such as stocks and bonds and they're not insured. Okay, so the deposits you make at an investment bank is not insured because they're taking riskier investments. So they didn't they wanted to differentiate between the two. So for the next 50 years after the Great Depression, things were looking pretty good. But then there was some high inflation in the 70s that led to a pretty bad crisis in the 1980s. So in the in the 1980s we call the savings and loan crisis of the 1980s. It's where these special types of banks called savings and loans banks. Uh they were taking riskier investments. Again it comes down to the riskiness that these banks are are taking when they're not being correctly regulated. Okay. Um So these savings and loan banks, their banks that that basically um take deposits and and find mortgages right? They they lend the money out as mortgages. Okay. So basically that's what they do, they get deposits and they find homeowners and and make mortgages to the homeowners and they keep it pretty simple. Alright. So during this period of the 1970s there was high inflation. And a lot of depositors were removing funds from savings and loans banks because they were trying to get higher interest. They'd rather invest in higher interest in other types of funds called money-market accounts. So to try and remain competitive, the Congress made some ease some regulations on savings and loans investments before it was pretty strict of what they could invest in generally home mortgages. But after this the savings and loans, they went into all sorts of risky investments. Right? So this is kind of a theme throughout history whenever the regulation is not there. Well they're gonna take all sorts of risks that they shouldn't be taking and then not on on top of the riskiness. There was also corruption going on through the savings and loans and eventually the savings and loans failed. F. D. I. C. Insurance. These these savings and loans banks were F. D. I. C. Insured and caused the government to foot the bill which is basically taxpayers footing the bill of approximately $124 billion to bail out these banks. Okay so this is pretty much all of the major events that happened before the big financial crisis of 2007 and 2009. We're gonna have another discussion about that in another video. But this is basically the main points of the history of the US banking system. I know we went through a lot really fast but like I said, there's not so much that you're gonna be tested on here. It's just good to know. Uh Basically the timeline of things. Cool. Alright let's move on to the next