Commercial banks are the most significant of the financial intermediaries, accounting for some 60 percent of the nation's deposits and loans. The first bank to be chartered by the new federal government was the Bank of the United States, established in Philadelphia in 1791. By 1805 it had eight branches and served as the government's banker as well as the recipient of private and business deposits. The bank was authorized to issue as legal tender banknotes exchangeable for gold.
In the next three decades the number of banks grew rapidly in response to the flourishing economy and to the system of "free banking", that is, the granting of a bank charter to any group that fulfilled stated statutory conditions. Government fiscal operations were handled initially by private bankers and later (after 1846) by the Independent Treasury System, a network of government collecting and disbursing offices. The National Bank Act (1864) established the office of the comptroller of the currency to charter national banks that could issue national banknotes (this authority was not revoked until 1932). A uniform currency was achieved only after a tax on nonnational banknotes (1865) made their issuance unprofitable for the state-chartered banks. State banks survived by expanding their deposit-transfer function, continuing to this day a unique dual banking system, whereby a bank may obtain either a national or a state charter.
The stability hoped for by the framers of the National Bank Act was not achieved; banking crises occurred in 1873, 1883, 1893, and 1907, with bank runs and systemic bank failures. The Federal Reserve Act (1913) created a centralized reserve system that would act as a lender of last resort to forestall bank crises and would permit a more elastic currency to meet the needs of the economy. Reserve authorities, however, could not prevent massive bank failures during the 1920s and early 1930s.
The Banking Acts of 1933 and 1935 introduced major reforms into the system and its regulatory mechanism. Deposit banking was separated from investment banking; the monetary controls of the Federal Reserve were expanded, and its powers were centralized in its Board of Governors; and the Federal Deposit Insurance Corporation was created.
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BANKS AND BANK ACCOUNTS
Banks and bank accounts are regulated by both state and federal statutory law. Bank accounts may be established by national and state chartered banks, and savings associations. All are regulated by the law under which they were established.
Until the early 1980's interest rates on bank accounts were regulated and controlled by the national government. A ceiling existed on interest rates for savings accounts. Interest payments on demand deposit accounts were generally prohibited. Banks were also prohibited from offering money market accounts. The Depository Institutions Deregulation Act of 1980 (D1DRA) eliminated the interest rate controls on savings accounts. The restrictions on checking and money market accounts were lifted nationwide.
The operation of checking accounts is governed by state law supplemented by some federal law. Article 4 of the Uniform Commercial Code, which has been adopted at least in part in every state, "defines rights between parties with respect to bank deposits and collections." Part 1 of the Article contains general provisions and definitions. Part 2 governs the actions of the first bank to accept the check (depository bank) and other banks that handle the check but are not responsible for its final payment (collecting banks). Part 3 governs the actions of the bank that is responsible for the payment of the check (payer bank). Part 4 governs the relationship between a payer bank and its customers. Part 5 governs documentary drafts. These are checks or other types of drafts that will only be honored if certain papers are first presented to the payer of the draft.
The banking crisis of the 1930's led to the development of federal insurance for deposits which is currently administered by the Federal Deposit Insurance Corporation. Funding for the program comes from the premiums paid by member institutions. The bank accounts of individuals at institutions which are insured are protected for up to an aggregated total of $100,000.
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