Learning Objectives:

  • Describe the history of the U.S. banking system from the 1700s to the present.

  • Explain the causes and consequences of the Great Depression on banking.

  • Identify key pieces of 21st-century banking legislation.

2.1 Early Banking and the Federal Reserve
The early U.S. banking system was fragmented and unstable, often leading to “panics” and bank failures . Attempts to form a central bank, such as the First and Second Banks of the United States, were ultimately unsuccessful. This instability culminated in the Panic of 1907, which eventually led to the establishment of the Federal Reserve System in 1913 to serve as a central bank and provide a more stable financial system .

2.2 The Great Depression and Bank Protections
The stock market crash of 1929 triggered the Great Depression, leading to widespread bank failures. This crisis resulted in the creation of two cornerstone protections :

  • Glass-Steagall Act (1933): Separated commercial and investment banking activities.

  • Federal Deposit Insurance Corporation (FDIC): Established to insure bank deposits and restore public confidence in the banking system.

2.3 Banking in the 21st Century
The banking industry faced significant challenges in the 21st century, including the 2008-2009 recession. This crisis led to major financial legislation :

  • Emergency Economic Stabilization Act (2008): Authorized the government to purchase distressed assets from financial institutions.

  • Dodd-Frank Wall Street Reform and Consumer Protection Act (2010): Aimed to reduce systemic risk and protect consumers.

  • Sarbanes-Oxley Act (2002): Strengthened corporate governance and financial reporting accountability following corporate scandals .

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