This presentation provides an original, but brief, new way to view the history of banking in America.

1. The History of Banking
IN ONE CHART
1865 1885 1905 1925 1945 1965 1985 2005

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A Chart About Bank Failures
There is no more powerful force in the U.S. bank industry than the credit cycle – the
undulating pattern of booms and busts that gave us the Roaring Twenties and the
Great Depression; the housing bubble and the Financial Crisis. Nothing better captures
the credit cycle’s savagery than the failures left in its wake. More than 17,000 banks
have gone under since 1865, equating to an annual average of 115.

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1865 1885 1905 1925 1945 1965 1985 2005
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The National Banking Acts of 1863 & 1864
The starting point for any conversation about bank history is the Civil War, or, to
be more precise, the National Banking Acts of 1863 and 1864. These created the
bank system we know today by (1) monopolizing the printing of bank notes
(i.e., issuing money) by the federal government, and (2) providing a mechanism
through which banks could acquire national, as opposed to state, charters.

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The Gilded Age: The Civil War to the Panic of 1907
The Gilded Age, a term coined by Mark Twain, was a particularly volatile episode
in bank history. Thanks to rapid economic expansion fueled by the American industrial
revolution as well as lax regulatory oversight, bank failures became a common
occurrence. Two crises in particular, the Panics of 1873 and 1893, ignited full-blown
economic depressions.

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1913: Creation of the Federal Reserve
The Federal Reserve was created in 1913 in an effort to reduce, if not stop, the frequent
occurrence of banking panics. To this end, it was empowered to lend hard currency to
banks besieged by depositors withdrawing their money en masse. The theory was
that, by providing access to all the currency sound banks needed to meet withdrawal
requests, it would remove depositors’ incentive to run on banks in the first place.

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Agricultural Depression of the 1920s
After World War I ended, the demand for American agricultural products plunged
throughout Europe. Farmers on the continent were again free to produce crops and
the warring parties no longer needed the profusion of supplies to feed their armies.
Prices for corn, tobacco, and other crops plummeted in the U.S., taking thousands of
small rural banks down too, as farmers could no longer afford to service their loans.

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The Great Depression of the 1930s
Following a decade of excess throughout urban America, the stock market crashed in
1929. In an effort to calm global markets and maintain the international gold standard,
the Federal Reserve unwittingly aggravated the situation by raising interest rates and
cutting the money supply. The Great Depression followed, leaving more than 5,000
failed banks in its wake.

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The Great Moderation: 1945-1975
Bank historians call the unusually quiet period from the end of World War II to the mid-
1970s the Great Moderation. Few banks failed over this stretch thanks to (1) increased
regulatory oversight under FDR’s New Deal legislation, (2) heightened conservatism
among bankers with firsthand experience of the Great Depression, (3) rapid economic
expansion following the war, and (4) the introduction of national deposit insurance.

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The OPEC Oil Embargos of 1973 & 1979
OPEC’s twin oil embargoes in the 1970s, a response to America’s support for Israel in the
1973 Yom Kippur War, set off a series of events that changed banking forever. Most
importantly, high oil prices accelerated inflation, which then caused the Federal Reserve
to raise short-term interest rates to nearly 20%. This triggered a deep recession in 1974
and caused banks to hemorrhage net interest income.

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The 1980s: A Most Volatile Decade
The 1970s turmoil culminated in 3 distinct financial crises a decade later. (1) An energy
crisis fueled by high gas prices led to the first too-big-to-fail bank, Continental Illinois,
which was nationalized by the FDIC in 1984. (2) High funding costs from the Fed’s assault
on inflation yielded the S&L Crisis. (3) And the recycling of petrodollars from oil producers
into loans to Latin American governments caused the Less Developed Country Crisis.

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1990s: The “Mergers of Equals”
In an effort to make the bank industry more resilient to regional economic downturns
and the stiflingly high short-term interest rates of the 1980s, Congress deregulated the
industry by, among other things, allowing banks to operate across interstate lines on a
national basis for the first time in history. This sparked a wave of bank mergers – the
“mergers of equals” – that gave us the nationwide branch networks we know today.

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The Financial Crisis of 2008-09
On its own, the financial crisis of 2008-09 seems to pale in comparison to the severity
of the combined crises of the 1980s – to say nothing of the Great Depression. But because
it came on the heels of the 1990s merger wave, the banks that did fail were almost
unrecognizably massive compared to earlier periods. Thanks to imprudent bets on
subprime mortgages, more than 500 lenders have since ceased operations.

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1865 1885 1905 1925 1945 1965 1985 2005
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