History in the United StatesEarly Years to the Federal Reserve
In the United States the first bank was the Bank of North America, established (1781) in Philadelphia. Congress chartered the first Bank of the United States in 1791 to engage in general commercial banking and to act as the fiscal agent of the government, but did not renew its charter in 1811. A similar fate befell the second Bank of the United States, chartered in 1816 and closed in 1836.
Prior to 1838 a bank charter could be obtained only by a specific legislative act, but in that year New York adopted the Free Banking Act, which permitted anyone to engage in banking, upon compliance with certain charter conditions. Free banking spread rapidly to other states, and from 1840 to 1863 all banking business was done by state-chartered institutions. In many Western states it degenerated into "wildcat" banking because of the laxity and abuse of state laws. Bank notes were issued against little or no security, and credit was overexpanded; depressions brought waves of bank failures. In particular, the multiplicity of state bank notes caused great confusion and loss. To correct such conditions, Congress passed (1863) the National Bank Act, which provided for a system of banks to be chartered by the federal government.
In 1865, by granting national banks the authority to issue bank notes and by placing a prohibitive tax on state bank notes, an amendment to the act brought all banks under federal supervision. Most banks in existence did take out national charters, but some, being banks of deposit, were unaffected by the tax and continued under their state charters, thus giving rise to what is generally known as the "dual banking system." The number of state banks expanded rapidly with the increasing use of bank checks.
Recurrent banking panics caused by overexpansion of credit, inadequate bank reserves, and inelastic currency prompted Congress in 1908 to create the National Monetary Commission to investigate the banking and currency fields and to recommend legislation. Its suggestions were embodied in the Federal Reserve Act (1913), which provided for a central banking organization, the Federal Reserve System (see also central bank).
Since the establishment of the Federal Reserve system, federal banking legislation has been limited largely to detailed amendments to the National Bank and Federal Reserve acts. The Glass-Steagall Act of 1932 and the Banking Act of 1933 together formed an extensive reform measure designed to correct the abuses that had led to numerous bank crises in the years following the stock market crash of 1929. The Glass-Steagall Act prohibited commercial banks from involvement in the securities and insurance businesses. The Banking Act strengthened the powers of supervisory authorities, increased controls over the volume and use of credit, and provided for the insurance of bank deposits under the Federal Deposit Insurance Corporation (FDIC). The Banking Act of 1935 strengthened the powers of the Federal Reserve Board of Governors in the field of credit management, tightened existing restrictions on banks engaging in certain activities, and enlarged the supervisory powers of the FDIC.
Several deregulatory moves made by the federal government in the 1980s diminished the distinctions among various financial institutions in the United States. Two major changes were the Depository Institutions Deregulation and Monetary Control Act (1980) and the Depository Institutions Act (1982), which allowed savings and loan associations to engage in often-risky commercial loans and real estate investments, and to receive checking deposits. By 1984, banks had federal support in buying discount brokerage firms, and commercial banks were beginning to acquire failed savings banks; in 1985 interstate banking was declared constitutional.
Such deregulation was blamed for the unprecedented number of bank failures among savings and loan associations, with over 500 such institutions closing between 1980 and 1988. The Federal Savings and Loan Insurance Corporation (FSLIC), until it became insolvent in 1989, insured deposits in all federally chartered—and in many state-chartered—savings and loan associations. Its outstanding insurance obligations in connection with savings and loan failures, over $100 billion, were transferred (1989) to the FDIC.
Further deregulation occurred in 1999, when Congress overhauled the entire U.S. financial system. Among other actions, the legislation repealed the Glass-Steagall Act, thus allowing banks to enter the insurance and securities businesses. Supporters predicted that the measure would permit U.S. banks to diversify and compete more effectively on an international scale. Opponents warned that this deregulation could lead to failures of many financial institutions, as had occurred with the savings and loans, and many blamed banking deregulation for the financial crisis that began in 2007. Extensive government intervention was required to maintain financial stability, and the crisis nonetheless resulted in an increase in failed and troubled banks, with the number of troubled banks higher than it had been in 15 years by 2009.
In the last decades of the 20th cent., computer technology transformed the banking industry. The wide distribution of automated teller machines (ATMs) by the mid-1980s gave customers 24-hour access to cash and account information. On-line banking through the Internet and banking through automated phone systems now allow for electronic payment of bills, money transfers, and loan applications without entering a bank branch.
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