Banking in America

When you want to buy a car, you go to a bank to take a loan. When you want to buy a house, you again go to the bank and take a loan. Have you ever thought about how the banking system emerged and became so sophisticated? What's the importance of banks for the U.S. economy? What's their structure, and how do they help individuals like you? Keep reading and get to the bottom of this article to find the answer to these questions and much more!

History of Banking in the U.S.

Arguably, the history of banking in the U.S. began when the Congress authorized the First Bank of the United States in the year 1791. The bank was a nationwide commercial bank that served as the bank for the federal government while also operating as a regular commercial bank in direct competition with state banks.

Its ownership was split between the federal government and private stockholders, and it was a nationwide commercial bank. When depositors submitted state bank notes to the First Bank of the United States, the bank would deliver these notes to the state banks and demand gold in exchange for the notes.

This made it difficult for the state banks to issue notes and have appropriate reserves. Consequently, when the charter for the First Bank of the United States was up for renewal in 1811, it was greeted with a significant amount of resistance from state banks, and the legislation to extend the charter was ultimately unsuccessful.¹

In January of 1817, six years after the First Bank of the United States was forced to close its doors due to losing its charter, the Second Bank of the United States opened its doors. During the War of 1812, the United States was plagued by significant inflation and struggled to find enough funding for its military activities. This was the primary impetus behind the decision to establish the Second Bank of the United States. As a consequence, the Treasury's standing in terms of its credit and ability to borrow was at its absolute worst level ever. After the war was over in 1815, a fast expansion of private banking followed, eventually leading to the Panic of 1819.

The United States National Banking System was established due to the passage of the National Banking Acts of 1863 and 1864 by the United States Congress. The National Bank Act provided incentives for creating a national currency that would be supported by the holdings of banks of securities issued by the United States Treasury.

In 1913, the Federal Reserve was founded, and it immediately started carrying out its function of implementing monetary policy.

The Great Depression resulted in the passage of legislation known as the Glass-Steagall Act, which established a barrier between commercial and investment banking. However, the Act was overturned in 1991, which is argued to have contributed to the economic catastrophe that occurred in 2008.

The Economics of Banking in America

Let's talk a bit about the economics of banking in America. The banking industry is a significant contributor to the economy of the United States and the rest of the globe. The United States Department of Commerce considers it a sub-sector of the more critical financial services business, including sub-sectors concentrating on asset management, insurance, venture capital, and private equity. Some people may define it more widely than this.

According to the Commerce Department, as of the end of 2020, the banking system in the United States alone had a total of $27.7 trillion in assets, according to Statista².

Wall Street Sign, Wikimedia Commons

Above is a picture of the Wall Street Sign, where most of the banking industry in the United States is placed. Wall Street is home to some of the largest banks in the U.S. and in the world.

The banking sector's primary contributions to the economy are: accepting deposits and providing loans.

The banking industry is essential to the functioning of the contemporary economy. As the principal provider of credit, it makes it possible for individuals to purchase things like automobiles and houses and for companies to buy equipment, grow their operations, and fulfill their payroll obligations.

Depositors also have the opportunity to earn some interest on their money while keeping it in a secure location.

On the other hand, there is the possibility that the banking industry may bring about enormously unfavorable effects on the economy.

U.S. Banking System Structure

The U.S. banking system structure is similar to any commercial bank you would see worldwide. The storage of financial assets is at the heart of all banking and is where the banking industry started in ancient times. Nevertheless, it had come a long way from when it used to store gold coins for affluent clients.

The most fundamental structure and function of a bank is to accept money deposits from customers, whether those customers be people or organizations, with the proviso that the money may be taken whenever the depositor desires (though sometimes with a penalty for early withdrawal). The bank could also give the depositor interest on their money, although this depends on the sort of account they have.

After then, the bank will lend the money it has on deposit to other people and companies, and in exchange, it will collect interest payments from those who borrow the money.

The lower interest rate that banks pay depositors for the use of their money and the higher interest rate that banks charge borrowers for borrowing money allows banks to profit from the spread between the two rates.

Banks are prohibited by law from lending out all the money currently in their possession. Instead, they are obliged by regulators to hold a specific amount of capital in reserve to meet the requirements of withdrawals and for other purposes. The standards shift from time to time and vary according to the size of the bank. Recently, it has been mandatory for many of the largest banks in the United States to retain 10% of their total capital in reserve.³

The dual banking system is unique to the United States, and it is not a banking system found in other countries. The dual banking system works by having banks licensed on either national or state levels. Depending on their license level, they are overseen by different regulatory agencies.

Banking Role in U.S. Economic Growth

Banking has played a critical role in the economic growth of the U.S. The roles that banks play in the economy are very important and varied.

They help families to better plan their consumption over time by saving and borrowing money, which improves the allocation of limited resources (capital) and allows households to better plan their consumption over time (which improves the allocation of scarce resources).

The creation of money is a crucial mechanism by which a more developed banking system helps economies grow faster. Banks provide the main channel through which savers can meet with borrowers.

Additionally, banks contribute to economic liquidity by financing illiquid assets with liquid liabilities to meet customer demand. While doing so, banks assist savers in managing the liquidity risk associated with their accounts. At the same time, they make long-term investment possible.

Government Banks in the USA

These state banks are not the same as the Federal Reserve bank (central banks). Central banks are concerned with the government's influence on monetary policy.

The majority of state banks are primarily concerned with providing personal banking services. In general, they comprise the acceptance of deposits, the provision of checking accounts, and the provision of commercial, private, and mortgage loans. Individuals and companies of a specific size may also open savings accounts at several state banks, where they can invest their money in fundamental financial instruments like certificates of deposit (CDs).

In addition to this, certain state banks will also provide various insurance options. Automobile, health, homeowner's, and life insurance plans are some of the most common types of personal insurance coverage.

There are many types of specialized company insurance plans, some of which protect against particular losses or injuries to workers, others guard against medical malpractice, and others provide professional liability insurance.