Transcript Money, Banking & The Federal Reserve: A Brief History

Money, Banking & The Federal
Reserve:
A Brief History
Prepared by Lauren Woodliff for
1775-1791: U.S. Currency
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To finance the American Revolution
Continental Congress printed the new nation's
first paper money.
Known as "continentals,"
Over production led to inflation
1791-1811: First Attempt at Central
Banking
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Congress established the First Bank of the United
States, headquartered in Philadelphia, in 1791.
Largest corporation in the country
Dominated by big banking and money interests.
Made some Americans uncomfortable and only lasted
20 years.
1816-1836: A Second Try Fails
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Political climate was once again inclined toward the
idea of a central bank.
Congress charters the Second Bank of the United
States.
Again, only lasted 20 years.
1836-1865: The Free Banking Era
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State-Chartered Banks & unchartered “free
banks”
Issued their own ‘notes’.
1863: National Banking Act
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Passed during the Civil War
Required taxation on state bank notes
Effectively created a uniform currency for
the nation.
1873-1907: Financial Panics
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Financial panic plagues economy.
Growing consensus that a central banking
authority was needed to ensure a healthy
system and an elastic currency.
1913: The Federal Reserve System is
Born
In December 23, 1913, when President Woodrow
Wilson signed the Federal Reserve Act into law, it stood
as a classic example of compromise—a decentralized
central bank that balanced the competing interests of
private banks and populist sentiment.
1914: Open for Business
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November 16, 1914
12 cities chosen as sites for regional Reserve
Banks were open for business, just as hostilities
in Europe erupted into World War I.
1920s: The Beginning of Open Market
Operations
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Open market operations as a monetary policy tool
Promoting relations with other central banks,
especially the Bank of England elevated the
stature of the Fed.
1929-1933: The Market Crash and the
Great Depression
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Warnings that stock market speculation would lead to
dire consequences realized.
October 1929, the stock market crashed and the nation
fell into the worst depression in its history.
Blamed speculative lending and inadequate
understanding of monetary economics and policies.
1933: The Depression Aftermath
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Congress passed the Banking Act of 1933
Separation of commercial and investment banking.
Required use of government securities as collateral for
Federal Reserve notes
Established the Federal Deposit Insurance Corporation
(FDIC).
Required bank holding companies to be examined by
the Fed.
More Changes..
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The Banking Act of 1935 Amendments
Creation of the Federal Open Market Committee
(FOMC)
The Employment Act follow WWII added maximizing
employment responsibilities
Bank Holding Act of 1956- increased regulations for
bank holding companies
1970s: Inflation
The 1970s saw inflation skyrocket as
producer and consumer prices rose, oil
prices soared and the federal deficit more
than doubled.
1980s: Deflation & Financial
Modernization
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The Monetary Control Act of 1980 required the Fed to
price its financial services competitively against private
sector providers and to establish reserve requirements
for all eligible financial institutions.
Marked the beginning of a period of modern banking
industry reforms
1990s: The Longest Economic Expansion
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Banks offer a menu of financial services, including
investment banking and insurance.
The decade was marked by generally declining inflation
and the longest peacetime economic expansion in our
country’s history.
After the 90’s
The effectiveness of the Federal Reserve as a central
bank was put to the test on September 11, 2001 as the
terrorist attacks on New York, Washington and
Pennsylvania disrupted U.S. financial markets.
9/11/01: Fed issued this statement
“The Federal Reserve System is
open and operating. The discount
window is available to meet liquidity
needs.”
The Recovery
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In the days that followed, the Fed lowered interest rates and
loaned more that $45 billion to financial institutions in order to
provide stability to the U.S. economy.
By the end of September, Fed lending had returned to preSeptember 11 levels
The Fed played the pivotal role in dampening the effects of the
September 11 attacks on U.S. financial markets.
After September 11, 2001
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In the days that followed, the Fed lowered interest rates and
loaned more that $45 billion to financial institutions in order to
provide stability to the U.S. economy.
By the end of September, Fed lending had returned to preSeptember 11 levels
The Fed played the pivotal role in dampening the effects of the
September 11 attacks on U.S. financial markets.
January 2003: Discount Window
Operation Changes
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Federal Reserve changed its discount window
operations
Rates at the window set above the prevailing Fed
Funds rate
Provided rationing of loans to banks through interest
rates.
2006 and Beyond:
Financial Crisis
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During the early 2000s, low mortgage rates and expanded access to
credit made homeownership possible for more people, increasing the
demand for housing and driving up house prices.
Securitization of riskier mortgages expanded rapidly, including subprime mortgages made to borrowers with poor credit records.
House prices faltered in early 2006 and then started a steep slide,
along with home sales and construction.
Falling house prices meant that some homeowners owed more on their
mortgages than their homes were worth.
2007: A crisis point
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Fears about the financial health of other firms led to massive
disruptions in the wholesale bank lending market.
Rates on short-term loans rose sharply relative to the overnight
federal funds rate.
The rising number of delinquencies on sub-prime mortgages was a
wake-up call to lenders and investors that many residential
mortgages were not nearly as safe as once believed.
As the mortgage meltdown intensified, expected losses rose
dramatically.
Losses spread across the globe.
2008: Outlook No Less Grim
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In the fall of 2008, two large financial institutions failed: the investment
bank Lehman Brothers and the savings and loan Washington Mutual.
The extensive web of connections among major financial institutions
meant that the failure of one could start a cascade of losses
throughout the financial system.
Confidence in the financial sector collapsed and stock prices of
financial institutions around the world plummeted
Ripple Effect
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Banks and investors clamped on loans.
Tightened standards and higher interest rates—a classic credit crunch.
Tight credit weakened spending on items financed by borrowing:
houses, cars, and business investment.
Households cut back on spending, affecting the supply and demand of
the economy.
Demand weakened, businesses canceled expansion plans and laid off
workers.
Sad But True
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The U.S. economy entered a recession, a period in
which the level of economic activity was shrinking, in
December 2007.
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The recession had been relatively mild until the fall of
2008 when financial panic intensified, causing job
losses to soar.