Banking History 476 PDF

BANKING AND FOREIGN TRADE C Pre-Revolution Banking • NO banks • Hamilton created the First Bank in response to foreign debt collected from the Revolution • His proposals: • Federal government assume state debts • Excise tax • National Bank • Argued paying debts in full would help establish credit...

BANKING AND FOREIGN TRADE C Pre-Revolution Banking • NO banks • Hamilton created the First Bank in response to foreign debt collected from the Revolution • His proposals: • Federal government assume state debts • Excise tax • National Bank • Argued paying debts in full would help establish credit New Bank and Political Parties • Hamilton’s proposals were controversial • Bank led to emergence of political parties • Hamilton and Washington: Federalists • Jeffersonians: Democrat-Republicans • Managed to compromise • National government assumed state debts • Moved Capital to the South First Bank • Monopoly • Government had 1/5 of the stock • Successful: • Made money • Provided services—loaned money, served as the government depository, transferred government funds free of charge • Provided assistance to business and industry • Checked overexpansion of state bank notes First Bank • Northerners loved it • Southerners hated it • Jefferson thought it was unconstitutional • Disliked that 72% of the bank’s stock was held by foreigners—non-voting stock—and only 8% held by Americans • Lasted 20 years • Charter not renewed in 1811 War of 1812 and Banking • Showed the Jeffersonians the necessity of a central bank • Disorganized • Payments suspended • State bank notes lost value Second Bank Similarities to First Bank • Government had 1/5 • Monopoly • Same issuance Differences From First Bank • Pay a $1.5 million bonus for a monopoly • Character of government prescription unprecise: cash or specie? • 1/5 of directors appointed by the President Bimetallic System • Minted gold and silver coins—15:1 • Few coins were minted • Gold overvalued: people sold it or hoarded it • Silver undervalued • 1806: Jefferson stopped coinage of silver Decimal System • Used to be based on the British monetary system • 1/12 • Changed to the decimal system of 1/10 • First nation to do this Second Bank • 1823: almost bankrupt due to a dishonest president • Reorganized under new head and conservative lines • Demanded debts • Unpopular • “Monster” Nicholas Biddle vs. Jackson • 1823: Biddle saved the bank • Jackson hated the banks • Biddle tried to get charter renewed • Biddle’s Panic: cut off loans to farmers • Jackson retaliated: moved all funds to “pet banks” The End of the Second Bank • 1836: Became a state bank • Ran into Panic of 1837 • Offered stability but was only in the hands of a few • 1841: Bankrupt State Banks Pre-Civil War • States eager to establish and invest in banks • Especially prevalent in South and West • Greater than 1500 state banks by 1860 • Louisiana: sophisticated system with specialized institutions Problems With State Banks • Panic of 1837 led to distrust • Prevalence of Wildcat banks • By 1862: 7,000 types of bank notes, along with 5,000 kinds of counterfeit money Progress in State Banking Policies • New York: Established safety fund system in 1829 • Suffolk, MA: Required country banks hold their deposits at the main bank Post-Civil War Banking Policy • U.S. Issued $450 million in “greenbacks” during the Civil War • Govt. acted quickly to restore gold standard, retire greenbacks • Debtors favored “easy money” policies • Crime of ’73: silver removed from money supply • Bland Allison, Sherman Silver Purchase Acts: minor victories • William Jennings Bryan: “Cross of Gold” speech Wizard of Oz: An Allegory? https://www.youtube.com/watch?v=lg93I5ydyNo National Banking • National Bank Act passed 1864, intended to: • Provide uniform currency • Stabilize issuance of bank notes • Create government bond market • 1865 tax made state bank notes obsolete • Provided enhanced stability and security • On the other hand, ignored needs of rural Americans • Did not create framework for cooperation between member banks • Pitfalls and banking innovations led state banks to become popular again First National Bank, Philadelphia Early 20th Century Unrest Panic of 1907 • Stock market fell ~50% • Lack of cooperation amongst national banks • Inefficient methods of exchange • No control over money supply Pujo Committee • Investigation by Congressman Arsene Pujo • Asserted that 5 banks held $22 billion in assets • Interconnectedness of boards The Federal Reserve System • Created by the 1913 Federal Reserve Act • Established 12 districts throughout the country • Originally intended to facilitate commercial banking Bankers & the Fed Benjamin Strong Jr. Paul Warburg Henry P. Davison “The greatest financier in history, one of the most feared and disliked men of his era” 1837 was born in Hartford Connecticut 1864 partnership with Charles H. Dabney > Dabney, Morgan & Co. 1871 Drexel, Morgan & Company 1895 >> J.P. Morgan & Company Susquehanna War of 1869 1st taste of railroading 1879 William H. Vanderbilt (owned 87% of NYC central shares) 1880s - reputation as a doctor for sick railroads 1890s - the dominant force behind the formation of the Federal Steel Company > Teddy Roosevelt attacked the trusts Panic of 1907 - Morgan headed a rescue committee of bankers 1912-13: Pujo Committee investigation (The Morgan Company. - 72/341 directorships) Its report broke his spirit - 1913 died After his death • Clayton Antitrust Act of 1914 - forbade intercorporate stockholding and price discrimination that lessened competition • Federal Reserve Act of 1913 - national banking system • His son - Jack Morgan 25,568 banks with more than 72 billion dollars in assets to 14,771 banks with around 51 billion dollars in assets The Great Depression • Roaring 20s • Private Sector and Federal Reserve Involvement • Policies Encourage Savings and Investment •Tax Cuts, Soldiers Bonus •Lowering of discount rate • However •(1928) Benjamin Strong raises the discount rate •Retrenchment Policy The Great Fear • Reconstruction Finance Corporation • 4000 failed banks • March 6th, 1933 declared a bank holiday by Roosevelt • Emergency Banking Act • End of the Panic New Deal Reform •Consensus that the Fed requires strengthening •End of the Gold Standard (June 1933) •OMOs •Glass-Steagall Banking Act (June 1933) -Creation of the FDIC -Regulation Q -Separation of commercial and investment banking •Board of Governors (1935) Banking in the modern era • Competition for deposit: • Withdrawal from the federal reserve system (limited interest rate payment to customers on their savings) • 1960: Commercial banks entered into savings and loan field by offering certificates of deposit (CDs) or long-term savings instruments with higher interest rates • CDs: from $1bn to $20bn invested in the first 7y • 1978: Money Market Certificates (MMCs) • Short term maturity (6 months) • Variable rate of interest • In 6 months: $32bn invested in MMCs • C&S National Bank • Most popular and massive innovation in the post WWII era: • Plastic money (credit cards) • Computer technology: reduce administrative costs Foreign Trade C BA / HISTORY 476 Latin American Involvement Desire for military strength, new markets and belief in cultural superiority (Manifest Destiny) • Monroe Doctrine (1823) • not recognized internationally Mexican-American War • Spanish-American War US acquired Guam, Puerto Rico, Philippine Islands from Spain; annexation of Hawaii • US liberated Panama from Colombia • acquired French rights for building Panama Canal (1901) Far East Pre-WW1 •Empress of China •Foreigner Animosity •Americans as Barbarians and Foreign Devils •Edmund Roberts •Opium Wars •Hong Kong as a gateway to the East •US and Japan •Commodore Matthew Perry •Commercial Treaty (1858) Far East Ice Trade •West Indies • Frederic Tudor • Ice • Salesman and Entrepreneur •Shipped ice as far as 10,000 miles • Shipped ice to the Far East until 1880 & Taft’s Dollar Diplomacy •Post WW1 Conditions •Debtor to Creditor Nation •Overseas interests of business = American foreign policy •Stability and Status Quo Post WWII Cont. • Exports grew steadily throughout World War II despite the threat of German U-Boats • Peaked at 14 billion in 1944 • U.S. controlled much of the western worlds’ wealth allowing for the Marshall plan Department of State • Expanded significantly after both WWI and WWII in order to protect American interests • Post WWII started to expand to new outposts in southeast Asia and Africa • Maintains 120 Consulates which occupy major urban centers and protect American business interests • Established Agency for International Development (AID) in 1961 • Helped to develop countries technically and economically Agricultural Trade and Service Industries Agricultural Trade • Rise, fall and rise of agricultural trade compared with manufacturing • 1970’s: Large population boom • Declining value of the dollar • New Types of production – Grains & Oil seeds replaced Cotton & Tobacco Rise in Service Industries • Service jobs at the expense of manufacturing • 1982: exceeded employment in manufacturing • Outsourcing - low-cost of labor Modern Asian Trade • Japan entered many U.S. markets in the 1960’s • Late 1990’s economic failures and subsequent bailouts • Japan, U.S. and Germany remain the major players 2016 Changes https://www.youtube.com/watch?v=r43LhSUUGTQ Current Banking Events - Algorithmic Trading • Computers programmed to follow a defined set of instructions for placing a trades • Automation of the process • Avoid transaction costs • Avoid Intermediary costs • High-Frequency • Timing, price, quantity following a mathematical model (signal based) • Possibility to trade at the nanosecond • “Fat-Finger” THANK YOU FOR YOUR ATTENTION C BA / HISTORY 476 $125,000 Who was responsible for the shipping of perishable ice to the Far East? A. Frederic Tudor B. Herbert Hoover C. Alexander Twinning D. James Harrison Which monetary system was the US decimal system based on? A. Spanish B. German C. British D. French The world has been divided into three great trading blocks: A. North America, EMEA, South Africa C. North America, Europe, Asia B. Americas, Western Europe, Asia D. Americas, Europe, Australia Who owned 87% of New York City Central shares during the 19th century? A. William H. Vanderbilt B. JP Morgan C. Cornelius Vanderbilt D. Marcus Goldman $250,000 Which of the following acts resulted in the creation of the Federal Deposit Insurance Corporation? A. Glass-Steagall Banking Act B. Emergency Banking Act C. Dodd-Frank Bill D. Banking Act of 1935 The Federal Reserve System was originally intended to: A. Conduct fiscal policy B. Conduct Monetary Policy C. Facilitate Commercial Banking D. Stimulate the Economy Introducing more silver into the money supply would positively affect: A. Creditors B. Commercial Bankers C. Debtors D. William McKinley Certificates of Deposits (CDs) experienced a wide success in the 1960s, with a dollar amount invested in the first seven years reaching: A. $32 bn B. $20 bn C. $15 bn D. $44 bn $500,000 During 1790-1807 total US exports increased: A. 5x (60M > 300M) B. 4x (60 M > 240 M) C. 6x (100M > 600M) D. 2x (100M > 200M) What government corporation did Hoover create which would later experience increased funding during FDR’s administration? A. Amtrak C. Reconstruction Finance Corporation B. Commodity Credit Corporation D. Federal Deposit Insurance Corporation Which of the following is NOT a reason Jeffersonians realized the necessity of a national bank after the War of 1812? A. War time currency was disorganized C. State bank notes lost value B. Specie payments to state banks suspended D. Uniform currency faced massive inflation Who of the following became the Governor of the Federal Reserve Bank of New York A. Benjamin Strong Jr. C. J.P. Morgan B. Paul Warburg D. Henry Davison $1 MILLION Which act forbade intercorporate stockholding and price discrimination? A. Banking Act of 1935 B. Federal Reserve Act of 1913 C. Clayton Antitrust Act of 1914 D. Glass-Steagall Banking Act What about the Second Bank is different from the First Bank? A. Had to pay the federal govt. a bonus of 1.5m C. Had a 20 year charter B. Govt. owned a 1/5th of the stock D. Had a monopoly The AID program helped fuel which American industry? A. Manufacturing B. Healthcare C. Agriculture D. Technology Which of these acts specified minimum prices for liquidation of government-stored commodities? A. Agricultural Trade Development and Assistance Act B. Agricultural and Consumer Protection Act C. Food and Agriculture Act D. Agency for International Development Act