Banking has changed in many ways through the years. Banks today offer a wider range of products and services than ever before, and deliver them faster and more efficiently. But banking's central function remains as it has always been. Banks put a community's surplus funds (deposits and investments) to work by lending to people to buy homes and cars, to start and expand businesses, to put their children through college, and for countless other purposes. Banks are vital to the health of our nation's economy. For tens of millions of Americans, banks are the first choice for saving, borrowing, and investing.
In most states of the early federal union, bank organizers needed special permission from the state government to open and operate. For a while, an additional layer of oversight was provided by the Bank of the United States, a central bank founded in 1791 at the initiative of the nation's first Secretary of the Treasury, Alexander Hamilton. Its Congressional charter expired in 1811. A second Bank of the United States was created in 1816 and operated until 1832.
In those days, city bankers tended to be extremely cautious about to whom they lent and for how long. To make sure they had enough cash available to meet unexpected demands from depositors, bankers generally made short-term loans only. Thirty to sixty days was the norm. Typically manufacturers and shopkeepers would use these funds to pay their suppliers and workers until they could sell the goods to customers. After that sale they would pay off the bank loan.
In less settled parts of the country, lending standards tended to be more liberal. There farmers could frequently obtain bank loans to buy land and equipment and finance the shipment of farm products to market. Because of the unpredictability of weather and market conditions, loan losses tended to be higher too.
When the second Bank of the United States went out of business in 1832, state governments took over the job of supervising banks. This supervision often proved inadequate. In those days banks made loans by issuing their own currency. These bank notes were supposed to be convertible, on demand, to cash—hat is, to gold or silver. It was the job of the bank examiner to visit the bank and certify that it had enough cash on hand to redeem its outstanding currency. Because this was not always done, many bank note holders found themselves stuck with worthless paper. It was sometimes difficult or impossible to detect which notes were sound and which were not, because of their staggering variety.
By 1860 more than 10,000 different bank notes circulated throughout the country. Commerce suffered as a result. Counterfeiting was epidemic. Hundreds of banks failed. Throughout the country there was an insistent demand for a uniform national currency acceptable anywhere without risk.
In response, Congress passed the National Currency Act in 1863. In 1864, President Lincoln signed a revision of that law, the National Bank Act. These laws established a new system of national banks and a new government agency headed by a Comptroller of the Currency. The Comptroller's job was to organize and supervise the new banking system through regulations and periodic examinations.
The new system worked well. National banks bought U.S. government securities, deposited them with the Comptroller, and received national bank notes in return. By being lent to borrowers, the notes gradually entered circulation. On the rare occasion that a national bank failed, the government sold the securities held on deposit and reimbursed the note holders. No owner of a national bank note ever lost his or her money.
National bank notes were produced and distributed through an involved process. Once the basic engraving and printing were done (at first by private printers, later by the U.S. Bureau of Engraving and Printing), the notes were entered on the books of the Office of the Comptroller of the Currency, then returned to the printer where the seal of the Treasury Department was stamped on each.
Next, the notes were shipped to the bank whose name appeared on them, where they were signed by two senior bank officers. The notes were then ready for circulation. National bank notes were the mainstay of the nation's money supply until Federal Reserve notes appeared in 1914.
National bank notes featured elaborate scenes and portraits drawn from American history. The complexity of their design was intended to foil counterfeiters. Today, collectors prize national bank notes as outstanding examples of the engraver's art.
The onset of the worldwide depression in 1929 was a disaster for the banking system. In the last quarter of 1931 alone, more than 1,000 U.S. banks failed, as borrowers defaulted and bank assets declined in value. This led to scenes of panic throughout the country, with long lines of customers queuing up before dawn in hopes of withdrawing cash before the bank had no more to pay out.
The banking crisis was the first order of business for President Franklin D. Roosevelt. The day after taking office, on March 5, 1933, he declared a bank holiday, closing all the country's banks until they could be examined and either be allowed to reopen or be subjected to orderly liquidation. The bulk of this work fell to the Office of the Comptroller of the Currency (OCC).
In June 1933, Congress enacted federal deposit insurance. Accounts were covered up to $2,500 per depositor (now $100,000). Other laws were passed regulating bank activities and competition, with the objective of limiting risks to banks and reassuring the public that banks were, and would remain, safe and sound.
During the last quarter century, banking has undergone a revolution. Technology has transformed the way Americans obtain financial services. Telephone banking, debit and credit cards, and automatic teller machines are commonplace, and electronic money and banking are evolving. The techniques of bank examination have changed, too. Today OCC examiners use computers and technology to help ensure that the banks they supervise understand and control the risks of the complex new world of financial services.
The OCC supervises national banks and enforces federal banking laws. It rules on new charter and merger applications for national banks, and conducts basic research on banking and the economy. The tools have changed, but for the OCC, the basic mission remains the same as in the days of Lincoln: to ensure a safe, sound, and competitive national banking system that supports the citizens, communities, and economy of the United States.
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