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Chapter 5 Federal Reserve System
States tried to do what they could to undermine the authority of the
bank. This led to a Supreme Court challenge to its constitutionality. In the
case of McCulloch v. Maryland’0708(+sgdbntqsqtkdcsg‘ssgdbqd‘shnmne
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not make the idea more popular, however.
While campaigning for president,
Andrew Jackson promised to do away with
the bank. He believed that a central bank
was un-American. Once Jackson became
president, he ordered that all government
funds be withdrawn from the bank. In 1836,
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charter. The period of time from 1837 to
1863 is known as the era of free banking.
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handled by state banks. Federal funds
were held in the US Treasury.
Banking Without a Central Bank
Without consistent regulation, many banks failed. This presented a
problem for the federal government. The government needed a system of
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The National Currency Actbqd‘sdcsgdNe›bdnesgdBnlosqnkkdqnesgd
Btqqdmbx’NBB(hm0752-SgdOffice of the Comptroller of the Currency
(OCC) created a uniform national currency and a system of national banks.
Today, the OCC still charters and supervises national banks.
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as the National Banking Act. The National Banking Act allowed the
federal government to charter private banks. These new banks issued
bank notes. Bank notes are intended to be used as currency and
promise immediate payment by the bank that issued the note. Each note
was backed by a government bond. The act also provided that notes
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state banks to seek national charters. A national charter came with strict
rules. Among other things, a minimum cash reserve was required.
In the late 19th century, the number of state-chartered banks
increased. Because state banks were not subject to the same strict
rules as were national banks, many state banks failed. This led to bank
panics in 1873, 1893, and 1907. A bank panic occurs when there is
a widespread worry that banks do not have enough money to cover
customer demands for withdrawals. A bank panic is usually started by a
run on a single bank. A bank run is when depositors fear their money is
not safe in the bank in which it was deposited. The depositors arrive in
great numbers at the same time to withdraw their money from the bank.
In addition, currency shortages arose when the federal government
reduced its debt. Reducing the debt meant reducing the number of government
bonds available to back bank notes. Bonds represent debt. In this case, a bond
represents money the federal government has borrowed from the bondholder.
After the bank panic that occurred in 1907, the idea of a central bank
began to take hold. In 1913, the Federal Reserve System was established.
Green Banking
The Environmental
Bankers Association (EBA)
is a nonprofit organization
that supports financial
institutions, such as banks, to promote social
responsibility in the industry. The EBA helps protect
the assets and income of financial institutions from
environmental exposure and liability.
BIZ TIPS
You can probably identify
national banks in your
community. A national
bank must have the word
National or the abbrevia-
tion N.A. (National Asso-
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