The national baking system had to evolve during the gold- standard years. The system, despite having a an adequate amount of banks, was having difficulty circulating enough currency for the growing nation. Checking accounts were becoming popular, but am abundant amount of banks had difficulties adapting to the challenge.
The Federal Reserve System
The Federal Reserve System was created in 1913 and is now often called the "Fed." The Fed is the nation's central bank, meaning it is a bank that can lend to other banks in times of need.
The Federal Reserve System was set up in some ways like a corporation. Any bank that joined had to purchase shares of stock in the system. All national banks, were required to do so, and state- chartered banks were eligible to buy shares as well.
The Fed's own currency, called Federal Reserve Notes, eventually replaced all other types of federal currency. Since the Fed had the resources to lend to other banks during periods of difficultly, it became the nation's first true central bank.
Banking in the Great Depression
Many banks were only marginally sound during the 1920s, despite the creation of the Federal Reserve System. One reasoning being that the number of banks soared between the Civil War and 1921, when the total exceeded 31,000. Although some consolidation occurred over the next decade, there were still too many small struggling banks at the start of the Great Depression in 1929.
By 1934, more than 10,000 banks had closed or merged with stronger banks. If account holders became worried about their bank , they would rush to withdraw money before it failed. This created a bank run, which cause many banks to fail. President Roosevelt announced a bank holiday, which is a brief period during which every bank in the country was required to close, on March 5, 1933. Several days later, after Congress passed legislation to strengthen the banking industry, most banks were allowed to reopen.
This shows the staggering number of bank failures during the Great Depression
Federal Deposit Insurance
When banks failed during the Great depression, depositors lost more or even all their savings because deposits were not insured. The Banking Act of 1933 corrected this by creating the Federal Deposit Insurance Corporation (FDIC) to insure customer deposits in case of a bank failure. In the beginning, the FDIC insured customer deposits to a maximum of $2,500 but today the limit is $250,000 per customer per bank.
Since the start of FDIC insurance on January 1, 1934 no depositor has lost a single cent of insured funds as a result of a failure ("Federal...). The FDIC insured deposits only. It does not insure securities, mutual funds, or similar types of investments ("Federal....). The Federal Deposit Insurance Corporation directly examines and supervises more than 4,500 banks. ("Federal...).
After the FDIC was created, people worried less about the safety of their deposits, which reduced the number of bank runs. If a bank was in danger of collapse, the FDIC could do one of the following
- Seize the bank,
- Sell it to a stronger one, or
- Liquidate it and pay off the depositors.
If the bank was sold, the sale was done in secrecy to prevent panic and to keep shareholders from selling worthless stock to unsuspecting investors.
Federal Reserve Notes
The Federal Reserve Notes that were first introduced in 1914 have become the most visible component of our money supply. All of the other federal currencies- National Bank Notes, Silver Certificates, Gold Certificates, and even the U.S. Notes, or "greenbacks"- have slowly retired and were replaced by Federal Reserve Notes.
During the gold standard years, every dollar of Federal Reserve Notes was backed by $0.25 gold reserves.
A Better Monetary System
Today, we have a uniform currency and a more efficient payment system, as well as a sound central bank, in part thanks to the Fed. The Federal Reserve Board is responsible for designing the U.S paper currency. The currency must be easily identifiable and difficult to counterfeit. The Fed released the first standardized design in 1929. In 1990, it introduced a special "thread" as well as "microprinting." Both made it difficult to produce convincing counterfeit currency even with advanced copy machines. In 1996, all currency notes went through major redesign for the first time since 129. Since the, the Fed has released new currency designs on different notes every few years.
However, there is once concern that some banks have become so large that they cannot be allowed to fail, because it was a problem the Red was not designed to manage.
“Federal Deposit Insurance Corporation.” FDIC: Who Is the FDIC?, FDIC Office of Inspector General, 10 Oct. 2015, www.fdic.gov/about/learn/symbol/. Accessed 6 Mar. 2017.