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by Jocelyn Simons

The 5-Minute History of Banking in the U.S.

What is a bank, really? And how did our banking system reach the place it’s in today? Here, we take a look at the history of banking in the USA–the successes, failures, and stops at Jekyll Island along the way.
A Civil War Era “Greenback”, courtesy of the National Numismatic Collection at the Smithsonian Institution A Civil War Era “Greenback”, courtesy of the National Numismatic Collection at the Smithsonian Institution

Banks act as intermediaries, to ensure that people who need money can borrow it and people who have money can store it safely. How this looks, feels and smells has changed over time. As we enter into a new era of fintech disrupting the banking industry, let’s get some context into what we’ve been through and how we got here.

Courtesy of the National Numismatic Collection at the Smithsonian Institution

1775-1791: Continental Currency

To wallop the British Army, the continental congress began issuing their own paper money, Continental currency, which was issued after the start of the American Revolutionary war in 1775. Everyone was happy and could afford to eat turkeys. That is, until Britain caught on and undermined the currency.

For the majority of the war, England controlled New York. On a large scale, they counterfeited the currency and disseminated it into the colonies, leading to massive inflation. During this time, “Not Worth a Continental” caught on as a trendy way to describe something utterly worthless.

First Bank of the United States

1791-1836: Central Banking

With the British out and a first failed attempt at a paper currency, what was a young U.S. to do?

In 1791, at the urging of Secretary of Treasury Alexander Hamilton, the First Bank of the United States was opened for business under Congress. The bank’s purpose was to handle debt from the Revolutionary War, create a standard form of currency, and raise money for the new government. Instead, it became corrupted to profit the wealthy, leading Congress to deny the renewal of its charter in 1811 by one vote. The Second Bank of the United States, chartered in 1816, didn’t last long either. In 1836, when the second charter was up for renewal, outspoken President Andrew Jackson said the bank “gave too few men too much power and caused inflation”. Needless to say, this bank charter was not renewed by Congress.

A bank note from the Free Banking Era

1836-1863: Free Banking Era

Talk about a disaster. During the Free Banking Era, state-chartered banks and unchartered “free banks” issued their own notes. This was confusing. A free bank could be any business — there are tales of Insurance Companies, Engineering Firms, and even steakhouses having their own currency.

In 1853, the New York Clearinghouse was created to simplify the chaotic settlement process among banks in NYC. (This later developed into the Automated clearinghouse, or what Simple uses to get money into your account from an external source).

During this time, as people wanted to get their money out of their mattresses, checking accounts became a thing.

A National Bank Note from Hawaii, courtesy of the National Numismatic Collection at the Smithsonian Institution

1863: National Banking Act

Another war, another shot at a single currency. Passed to fund the Civil War, the National Banking Act created national banks, which issued currency backed by U.S. government securities.

The act issued national bank charters, required that banks hold reserves for each account, and created a uniform currency. The act did not, however, create a central bank to expand or contract currency in circulation to stabilize the economy.

The War of Wealth

1873-1907: Financial Panics Prevail

The National Banking Act created a uniform currency for the states, but nobody was in charge of regulating it. So, in 1893, a panic from too many runs on banks triggered a depression, and financial mogul J.P. Morgan had to step in to bail everyone out. In 1907, Wall Street speculation with public money triggered another depression, and there was J.P again, ready to save us from ourselves.

Jekyll Island

1908-1913: Jekyll Island and The Federal Reserve

By now, it was apparent that a central banking authority was needed to ensure a healthy banking system. So in 1910, a group of bankers, under the rouse of a “gentleman’s duck hunting expedition,” held a shady meeting on a sketchy island off the coast of Georgia—literally called Jekyll Island—to draft a proposal for a private central banking system.

This commission of bankers was disbanded by the President in 1912, and their plans were modified, but in 1913, the Federal Reserve Act of 1913 was signed into law. The Federal Reserve was to be responsible for smoothing booms, busts, inflation, and deflation in the economy, while ensuring the money and credit available is appropriate for the level of the economy’s production.

1929 Wall Street Crash

1920s: Open Market Operations and the Crash

The 1920s were a testing time for the Federal Reserve. In the early 1920s the Fed was able to stave off a recession, but by the end of the decade, showed weakness when it failed to intervene. Traders at big banks made risky investments with public money, lost it, and inevitably caused the October 1929 stock market crash. The country plunged into the worst depression in its history. From 1930 to 1933, 10,000 banks failed.

Depression era family

1930s: The Depression’s Aftermath

In response to the Great Depression, Congress passed the Glass-Steagall Act in 1933 to ensure the same mistake was not made twice. The act called for the separation of commercial and investment banking, so the money in checking accounts couldn’t be used to invest in a risky portfolio. The act also established the Federal Deposit Insurance Corporation (FDIC), which to this day insures Simple accounts, through our our partner banks The Bancorp Bank and Compass Bank, Members FDIC. This helped to rebuild the reputation of the banking industry, so people didn’t feel like they had to keep their money in their mattress. The act also placed Open Market Operations officially under the Federal Reserve, and prohibited interstate banking.

Signing of the Treasury Accord, image courtesy of Federal Reserve History

1951: The Treasury Accord

Let’s skip ahead to 1951, where an accord was signed that outlined what the Fed and Treasury were responsible for. The Treasury Accord states that:

  • The Department of the Treasury is responsible for things like printing currency, managing the government’s budget, collecting taxes, and enforcing finance and tax law, and
  • The Federal Reserve does things like influences the flow of money to maximize employment, stabilizes prices, and regulates the safety and soundness of the banking and financial system.

Richard Nixon

1970s: Inflation and disinflation

The 1970s were messy. In 1971, President Nixon unveiled a new economic plan to help revive the economy and control inflation. This plan ended the gold standard, which allowed the currency to float on world markets, and was intended to increase demand for U.S. goods in foreign markets.

However, in 1973, the Middle East War occurred. Oil prices went up, oil production went down, and an oil embargo was placed on the U.S. which generated even higher inflation and a trade deficit. This oil embargo triggered a global recession for 1974 and 1975. By 1979, inflation rose to over 13%, and unemployment 11%. Using open market operations, the Federal Reserve was able to get double digit inflation under control, but boy, what a nightmare.

Reagan in a televised address, image courtesy of National Archives and Records Administration.

1980-1999: Economic Expansion

By the 1980s and 90s, the Fed had figured out how to help steady the economy. When the stock market plummeted in 1987, Chairman Alan Greenspan publicly stated that the Fed would be ready to serve as “a source of liquidity to support the economic and financial system;” a statement that kept the economy steady through the 90s. Through the credit crunch of the early 90s to the Russian default on government bonds in 1998, the Fed kept their promise to use monetary policy to keep the economy rolling… and roll it did.

Bill Clinton

1999-2007: Economic Boom

The economy had been doing well for a while, and the government and financial institutions wanted to plan ahead to keep the party going. They realized that in good financial times, people invest. In tough financial times, people put their money into savings. Because of this yin and yang, it was thought that if we could combine investment and savings under one roof, we could have an immensely stable financial institution as it would be successful in any economic state.

In 1999 the Gramm-Leach Bliley, or Financial Services Modernization Act, was introduced to repeal part of the Glass-Steagall Act and remove barriers in the market among investment banks, commercial banks, and insurance companies. Rules were then put in place to ensure that financial institutions could not play with consumer money just like they had before, and cause another Great Depression. One of these rules allowed banks to have less capital on hand for mortgages, which encouraged commercial banks to provide mortgages. Why is this important? Read on…

Barack Obama

2007-2010: Recession and Recovery

Between 1998 and 2006, average house prices in the U.S. more than doubled and mortgage debt rose from 61% of GDP to 97%. Mortgage-Backed Securities, or Collateralized Debt Obligations (CDO’s) factored into steep change, because CDO’s allowed lenders to take larger risks and give mortgages to people with bad credit and lower income.

Then in 2007 the real estate market collapsed, and with it, the securities value declined. This was a big deal—some of the banks had so many of them on their books that without their value, those banks wouldn’t have enough money for the rest of their banking obligations. This led to the Troubled Asset Relief Program (TARP) which used ~$700 billion to bail out the big banks that were in trouble.

The Dodd-Frank Wall Street Reform and Consumer Protection Act were signed into law in July, 2010. This regulation introduced the Financial Stability Oversight Council to monitor higher risk financial institutions, capped banks’ growth through trading for their own accounts, and regulated derivatives.

Josh Simple 2016

2009 - Present: FinTech Evolution

In the wake of high regulation from the recession, banks getting a bad rap, an increasingly accessible mobile and web environment, and a market flood with cash, financial technology (fintech) was born.

While most banks in the U.S. began online banking in the late 1990s, it took investment in financial technology firms to blow up just a few years ago for the fintech industry to really take off. Just last year, more than $22 billion was invested in fintech companies. Fintech firms have pieced together traditional bank offerings, going largely mobile and offering different products. But fintech banking services sometimes still rely on partnerships with larger, more established banks to help them with connection to payment networks (like ACH), the bank charter which allows them to do business, and the security of FDIC-insurance.

And that’s where we come in. Back in 2009, Simple was just two people in a basement in Brooklyn. We signed on our first customer in 2012, and have since have partnered with two banks—The Bancorp Bank and BBVA Compass. Today, we’re providing banking services to people all over the country, and hitting go on this post in an office with more than 300 employees. I was lucky enough to join the finance team at Simple in 2015, and I look forward to being part of the future of banking.

Disclaimer: Hey! Welcome to our disclaimer. Here’s what you need to know to safely consume this blog post: Any outbound links in this post will take you away from Simple.com, to external sites in the wilds of the internet; neither Simple nor our partner banks, The Bancorp Bank and BBVA Compass, endorse any linked-to websites; and we didn’t pay/barter with/bribe anyone to appear in this post. And as much as we wish we could control the cost of things, any prices in this article are just estimates. Actual prices are up to retailers, manufacturers, and other people who’ve been granted magical powers over digits and dollar signs.