Reunification Era - Money & Banking 2

Reunification Era - Money & Banking 2 - Reunification...

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Reunification Era: Money & Banking (Ch. 19) continued o To create a more uniform system under National Bank Remember there is no national banking “system” For example: Reduced the amount of required bond holding for NBs Scaled the reserve requirement to city size Goal – to bring banks under NB restrictions Not very effective Table 19.1 – remember # of SBs decreased then started increasing Lots of banks experienced bank runs and didn’t have adequate reserves Led to recession To get money, banks could give out bonds or call in loans If that isn’t enough, banks close its doors – suspension of payment All of these things, decrease the money supply M↓V = PY↓ (leads to real output decline) o Widespread suspension of payments At many banks Lasted as long as 2 months at some banks Led to severe cash shortages (↓M) and ultimately recession (↓Y) 1908: Aldrich-Vreeland Act National Currency Associations o NCAs were an attempt to create a potential lender of last resort for banking system o Features: Groups of 10 or more banks that were certified as being in “sound financial condition” could apply to be NCAs NCAs were empowered to make emergency loans to banks experiencing runs / cash shortages Incentive to be NCA – customers would feel safer with a sound bank and makes it less likely that a bank run would occur at that bank National Monetary Commission o Appointed to study the U.S. banking system & to make recommendations for reforms o Recommendations: A central bank should be created to hold commercial bank reserves and act as a lender of last resort
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The central bank should also serve as the fiscal agent for the federal government (as opposed to treasury) Created Federal Reserve System o 1913: Federal Reserve System (Fed) created Central bank Typical features of a central bank o Clearing house o Lender of last resort o Exercise macroeconomic (countercyclical) policy o Fiscal agent for federal government o Bankers’ banks – bank that is exclusively for the use of other banks Permanent charter Congress doesn’t have to re-vote to re-charter it Removes the Fed from political pressure from Congress 1 st Bank of U.S. (1791) 2 nd Bank of U.S. (1816) There had been federally created banks before the Fed, but they each lasted only for 20 years and were not central banks because: o Not bankers’ banks (competed with private banks) o Did not perform clearing house function o Not required to be a lender of last resort o Did not exercise macroeconomic policy
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Reunification Era - Money & Banking 2 - Reunification...

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