107 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 (1819), the court ruled that the creation of d a central bank was within the power of Congress. The court’s decision did 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 Once Jackson became president, he ordered that all government funds be withdrawn from the bank.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, he vetoed the bill that renewed the bank’s charter. The period of time from 1837 to 1863 is known as the era of free banking. During this time, all bank functions were 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 strong and reliable banks from which it could get fi nancing for the Civil War. fi The National Currency Act created the Offi of the Comptroller of the fice Currency (OCC) in 1863. The Offi ce 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. In 1864, the National Currency Act was modifi ed and became known 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 issued by state banks would be charged a 10% tax. This persuaded most 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 nonprofi t organization that supports fi nancial institutions, such as banks, to promote social responsibility in the industry. The EBA helps protect the assets and income of fi nancial institutions from environmental exposure and liability. BIZ TIPS You can probably You can probably identify a can c n a u b a probabl b b b b b b o o Yo You Y Y b b r r u b r b u Y l a Y p ou national ban national banks in your ban o natio n o n b at b t b n a b n community community. A national ty co o c u t y mu bank must bank must have the word ba b us k National or the abbrevia- l tion N.A. (National Asso- ciation) in its name. i i ) i i