The Banking System of the United States
The first banks in America came into being around 1791. These banks were required to obtain permission from the state government for them to operate. The central bank of the United States was formed in 1791 and was called the Bank of the United States. This bank provided additional oversight and was initiated by Americas first secretary of the treasury, Alexander Hamilton. A second bank of the United States was formed in 1816 after the expiry of the charter of the first bank (Pearson Par 2).
The banks of those days were very cautious about who they lent money, how much they lent and for how long. They avoided long term loans so as to meet unexpected demands from the depositors. The normal lending period ranged from 30 to 60 days. However, rural lending was more liberal. Farmers used to get loans to purchase farm machinery and pay for the transportation of their farm produce. Because of the unpredictability of the weather, loan losses were high (Pearson Par 3).
The biggest problem those days was lack of a uniform currency. Counterfeiting was the order of the day and commerce suffered greatly. The congress responded to this problem by passing the National Currency Act in 1863. President Lincoln signed a revision of that law in 1864, the National Banking Act. The laws established a new system of banking that was to be headed by a Comptroller of the Currency. This was to be the beginning of the conception of a uniform currency that would be accepted everywhere without risk, a currency that would make it hard to counterfeit (Pearson, Par 4).
The banking system of the United States has undergone a major revolution. This has been as a result of advanced technology which has seen Americans get better and faster services from the banks. Such technologies include telephone banking, debit and credit cards, automatic teller machines and electronic money transfers. The Office of the Comptroller of Currency continues to monitor the operations of the banking sector in the United States. However, its methods and techniques of doing so have been changed by the current technology. Today, this office uses computers to ensure that banks follow the guidelines set to ensure that a smooth banking industry is in place and both depositors and borrowers are protected (Pearson, Par. 4).
William A. Scott writing on the banking system of the United States identifies three kinds of institutions. These include the state banks which have been organized with respect to the various banking acts of the respective states, national banks founded under the authority of federal law, and the private institutions which have emerged without the authorization of any statute, specific or general (Scott, Par. 1).
The most central and dominant position in the United States banking system is taken by the national banks. There are several factors that have contributed to this domination by the central banks. First, they enjoy a monopoly of the right of note issue. They are also supervised and regulated by the federal government and are the most convenient correspondents for the state and private banks. (Scott Par 2)
All institutions organized under the authority of national banking act are required to invest a part of their capital in the United States registered bonds. This investment should be to the par value of which it is permitted to issue notes, if the market value is not below that point. The comptroller of currency at Washington is the custodian of these bonds, together with an amount of cash equal to five percent of the notes circulated by the bank. This sum is supposed to be used in the redemption of the notes for which the comptroller acts as an agent of the banks. The bonds help the government to guarantee the chief banking systems of the world payment of note incase the banks fail (Scott, Par. 4).
The banking act of the United States requires banks to maintain a minimum percentage of the cash deposited with them for the sake of protecting the depositors. Different banks are required to maintain different percentages of the deposits, the difference being primary in terms of the location. Those banks located in a number of cities designated as reserve zones are required to maintain a minimum balance of 25 of the aggregate amount of the notes and deposits. All the other banks have been given a minimum of 15 to maintain (Scott, Par. 4).
The comptroller is under the obligation to ensure strict observance of these regulations. To do this effectively, he normally inspects the banks at regular intervals, and calls upon them for complete reports of their condition at least five times every year. The dates for these reports are set by the comptroller himself (Scott, Par. 5).
The Encyclopedia of the Nations indicates that the United States has a central banking system which was provided for by the Federal Reserve Act of 1913. The Federal Reserve Bank system is a government organization which is independent. It has important posts which are appointed by the president and approved by the Senate. It dominates the US banking with strong influence in the dealings of commercial banks. It exercises unlimited control over money supply (Encyclopedia of the Nations, Par. 1).
The 12 Federal Reserve districts in the United States have each a federal bank. This bank is presided over by a board of nine directors, six of whom are elected by the member banks in the district and the rest are appointed by the board of governors of the Federal Reserve System and are presumed to represent the public. This is because they are supposed be officers, directors, stockholders, or employees of any bank (Encyclopedia of the Nations, Par. 2).
It is the federal reserve board that regulates the money supply and the amount of credit available to the public by asserting its power to change the rediscount rate, through buying and selling securities in the open market, by setting margin requirements for securities purchases and by altering the reserve requirements of member banks in the system. They also achieve this by resorting to a specific number of selective controls at its disposal (Encyclopedia of the Nations, Par. 3).
According to The Columbia Electronic Encyclopedia, the deregulation that occurred in 1999 overhauled the whole US financial system. The legislation repealed actions like the glass-steagall act, allowing banks to enter the insurance and securities market. It was hoped that this would allow US banks to diversify and compete more effectively on the international scale. However, there were those who felt that this measure could lead to failures in many financial institutions, as had happened with the savings and loans (ENotes, Par.1).
The banking system of the US has had its rough time too. Mike Whitney in his article, US banking system in the brink of collapse in 2008 reported that the banking system was basically underwater and insolvent. He believed that the sudden and shocking depletion of bank reserves was due to the huge losses inflicted by the meltdown in sub prime loans and other similar structured investments. In his article, he attempts to explain the means by which capital is lost in an economy. According to him, this happens when US home owners default on their mortgages in large numbers. In such cases, they destroy money faster than the Fed can replace (Whitney, Par. 1-4).
The US banking system is one of the oldest and most sophisticated. It has grown through time to give its clients exceptional services. However, it has not been without major challenges which it has braved through.