Alexander Hamilton Proposed Using A Banking System

The panic of 1907 and the Great Recession of 2007-2009 has both been major economic events in the United States economic history. This paper compares and contrasts these two major events and enables us to understand importance of certain financial institutions and regulations during troubled times in the financial sector. In this paper, both panics of 1907 and 2007 are historically analyzed and compared.

When Franklin D. Roosevelt was elected to his first term as president of the United States in 1932, America was in a severe depression. When Franklin Roosevelt took office in March of 1933, President Hoover handed the problems of the Great Depression over to Roosevelt. Upon taking office, Franklin Roosevelt issued a bank holiday which forced all banks to close from March 6 to March 10 while he met with Congress to pass the Emergency Banking Act to allow banks with enough money to reopen and for the Federal Government to help the banks that did not have enough money (A Bank). This act was a prerequisite to many other programs that would develop under Franklin D. Roosevelt’s administration. Under

Hamilton’s creation of the first bank in the United States continues to exist in today’s economic environment. However, at that time Hamilton’s proposal was met with widespread resistance from individuals such as James Madison and Thomas Jefferson who considered the creation of a federal bank as unconstitutional. The analysis made by Gordon in his book is consistent with arguments made by to have a bank that would be effective in order to implement the powers authorized by the government as it was implied in the constitution

The banking industry as a whole after the stock market crashed was going bankrupt due to not being able to carry the “bad debt” that was created from using customer money to buy stock. Because the banks were out of money, they were unable to cover customer withdrawals from their bank, causing many bank customers to lose all of their savings. With the uncertainty of the future of the banking industry, many people withdrew all of their savings, which caused more than 9,000 banks to close their doors and go out of business (Kelly). Due to the effects of the Great Depression, and the collapse of the banking industry, the government created regulations to prevent similar failure in the future. For Example, the SEC, (or Securities Exchange Commission), which regulates the sell and trade of stocks, bonds and other investments was created as a result of The Great Depression. The FDIC (or Federal Deposit Insurance Corporation), was created to insure bank accounts so that that the consumer would be protected if the bank were to go out of business (Kelly). The Great Depression's effect on the banking industry led to many useful changes to the banking industry and helped restore confidence in banks in the American people.

In doing so, Bruner and Carr are better able to elucidate the ways in which individual actors caused the rapid decline of the American economy in late 1906. In this, Bruner and Carr begin the text by highlighting the influences and magnitude of the major players in the financial services sector in the early twentieth century. Perhaps the most notable of the those mentioned is that of J. Pierpont Morgan, the Wall Street Oligarch for which the contemporarily “too big to fail” financial services entity J.P Morgan-Chase is named. In highlighting these individuals and their over-inflated influence on the financial system, Bruner and Carr subtlety highlight one of the biggest problems facing the financial services sector during this time period—the lack of regulation. To further elucidate this point, the books opening chapter follows the interactions between J.P Morgan and his other colleagues in George F. Baker, president of the First National Bank of New York and James Stillman, president of New York’s National City Bank. Here, the text focuses on the ways in which they inconspicuously competed and colluded with each other to make their fortunes larger and more

Many say the banks were the main reason for the unraveling events of the Great Depression. Making risky loans that barrowers could not pay back, due to the amount of money going out and not enough coming in. When the economy slowed people went back to the banks to get their money they invested to save for a harsh period like the Great Depression to find out its been drained which forced the banks to begin calling back loans and foreclosing on people. Even after recalling all the loans the bank still was short the cash to reimburse the hundreds who lost their hard-earned cash. Which devastatingly led to many banks failing leaving them to shut their doors.

The second major event in this chain was the banking crisis. Before The Great Depression hit, our countries banking system was characterized by having numerous small to medium sized firms, which meant they were prone to going bankrupt. As I previously stated, banks had been extremely over-generous with handing out loans. A good percent of these loans was invested into the stock market and lost when it crashed. Some banks even invested depositors’ money themselves into the stock market. The investors were unable to pay back the money to the banks and banks started going under. Bank policies during this time were very poor. They did not have guarantees to their customers that if the bank failed, they would be reimbursed for the deposits like we have nowadays. This caused depositors to rush and withdraw their money, and banks were forced out of business because they didn’t have all the money. By the inauguration of Franklin D. Roosevelt in 1933, the banking system had practically ceased to function. Checks were unable to be trusted because nobody knew if they were worthless or sound (Ganzel). All this pandemonium with the banking system caused the public to panic and make it worse.

As I have stated before bank regulations are in place to be the backbone of the U.S. economy. Therefore, we live in a system that affects us every day. Banks have certain requirements and instruments that help them stay open and be profitable. In the 1990s, interstate banking was finally permitted to create nationwide banks of unprecedented size. Congress 's also attempted to force banks to make home loans to people who had limited creditworthiness. These regulations are a major factor in why as many banks failing and disappearing today as we did pre Federal Reserve System.

One cannot say that U.S banking system is designed to fail; however, it is the relentless deregulation in the financial sector and competing for financial sector activities in the globalized financial market as means towards higher growth resulted in its instability over the centuries. The U.S. central bank and federal government did not see the impending crisis on the horizon due to the deregulation of financial market. The central bank believed that there could be evolving economic imbalances or risk in the financial markets, but that these were best managed by market forces themselves. But they failed to realize that some time market fails on its own. Deregulation of the financial sector was initiated and reinforced through legislative changes, followed by regulatory policies consistent with the philosophy of deregulation. As the US was losing comparative advantage in agriculture, manufacturing, and services to developing and emerging market economies, while they continued to have advantage in the financial sector. Hence, the United States perhaps felt that national interest lies in their dominating financial sector activity, and hence development of the financial sector was coterminous with their national interest. This approach could have led to a race to the bottom in financial sector regulation in their jurisdiction. The US banking system and financial sector was source of so much instability was due to relentless deregulation of the financial market.

The history of central banking in America is a very interesting topic that carries a direct impact on today’s banking. The paper focuses on how the centralized banking system started with special emphasis on the First and the Second banks of America and the inception of the Federal banking system. Highlighted also are the circumstances that led to the established of the financial organs alongside the relevance of the Federal Reserve today (Fischer, 2015). The topic directly impacts on how financial crisis and all the economic challenges are being handled today. The Federal Reserve is still the one which regulates all the fiscal activities of America. The Federal Reserve refers to the centralized banking organization of America. The banking system was established early in the 20th century through the adoption of the Federal Reserve legislation. The inception of the central system was majorly triggered by a sequence of fiscal worries specifically the famous 1907 fright. The Federal Reserve Act had notably passed through several hearings, debates alongside changes and was upheld by the majority in the congress. The Federal Reserve System came as the third central banking system of America, after the first and the second banks of America (Bordo, 2015).

Before the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933 and the general conception of government safety nets, the United States banking industry was quite different than it is today. Depositors assumed substantial default risk and even the slightest changes in consumer confidence could result in complete turmoil within the banking world. In addition, bank managers had almost complete discretion over operations. However, today the financial system is among the most heavily government- regulated sectors of the U.S. economy. This drastic change in public policy resulted directly from the industry’s numerous pre-regulatory failures and major disruptions that produced severe economic and social

The depression forced dozens of states to regulate how much money was being withdrawn. In response to the bank failures, President Roosevelt’s main priority was to get money flowing back into the economy. First, Congress passed the Emergency Banking Act of 1933, which permitted banks to reopen if a Treasury Department inspection showed the banks had sufficient cash reserves. Then in 1935, President Roosevelt signed a new bill into law, the Glass-Steagall Act, which divided commercial and investment banking. In other words, “...commercial banks, which took in deposits and made loans, were no longer allowed to underwrite or deal in securities, while investment banks, which underwrote and dealt in securities, were no longer allowed to have close connections with commercial banks, such as overlapping directorships or common ownership.” The former network between the commercial and investment banks were believed by many as the main cause of the stock market

According to History of Investment Banking in the United States Investment banking in the United States emerged to serve the expansion of railroads, mining companies, and heavy industry.” With this help Investment banking and america grew exponentially hand in hand up until the year 1929. Before the great depression, investment banking was in its golden era. At the time the market was then led by JPMorgan and The National City Bank, They often had to step in and influence the market to sustain the financial system.

In 1791, U.S. Congress established the First Bank of the United States, headquartered in Philadelphia in response to the rapidly inflated paper money “continentals”. However, Congress refused to renew the bank’s charter in 1811 because many Americans then were uncomfortable with the idea of a large and powerful bank. By 1816, the idea of a central bank was once again aroused; by a narrow margin, Congress agreed to charter the Second Bank of the United States. But the Second Bank’s charter expired in 1836 without a renewal neither. During the Free Bank Era (1836-1865), risks of financial crisis accumulated. In 1893, a banking panic triggered the worst depression the United States had ever seen, and in 1907, a bout of speculation on Wall Street ended in failure, triggering a particularly severe banking panic. On December 23, 1913, President Woodrow Wilson

According to B.E. Gup (2004), the same was true of the United States during the Great Depression; in response to varying competitive environments, federal authorities approved notably larger authority to banks during the start of the 20th century, for example in the securities market. “The U.S. conceit that its financial and regulatory system could withstand massive capital inflows on a sustained basis without any problems arguably laid the foundations for the global financial crisis of the late 2000s” (Reinhart and Rogoff 2011). The rational of ‘this time is different’ in the U.S. due to its superior structure was proved false.