How Banking Has Changed Since the Year You Were Born
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Bob Haegele
9 min read
A world without banking is a world that’s difficult to even imagine in modern times. Although banking has been around in some form for thousands of years, modern banking has a much briefer and more recent history, marked by everything from people emptying their savings accounts in a panic to giving women access to credit and completely changing how they operate in society.
The Panic of 1907 began when F. Augustus Heinze and Charles Morse made a failed attempt to corner the market for shares in Heinze’s United Copper Company. When the scheme failed, there was a run on banks which led to a nearly 50 percent drop in the stock market. It also caused the failure of Knickerbocker Trust Company. JP Morgan had a chance to rescue Knickerbocker but initially declined. However, as more and more banks and trusts entered bankruptcy, Morgan stepped up to stop the run on the banks.
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1910s: The Federal Reserve Bank is Formed in 1913
The Panic of 1907 along with other financial panics led to a call for more centralized control of the monetary supply. Given that it was only the actions of a private citizen that was able to stop the run on the banks in 1907, there was a clear need for a federal agency that could inject liquidity during these crises. As a result, the Federal Reserve Act of 1913 established the Fed. Although the Federal Reserve brought much-needed stability to the business world, additional crises would lead to expansion of the Federal Reserve’s responsibilities over the years.
1920s: The Roaring Twenties and the Stock Market Crash
While there isn’t a consensus on the exact causes of the crash, it is generally attributed to the rapid expansion during the roaring twenties. People began to invest money they couldn’t afford to lose, on margin, and even banks speculated in the market. Then, on October 24th, 1929, known as “Black Thursday,” the market lost 11 percent in a single day — the largest selloff in history to that point. However, on ensuing days, “Black Monday” and “Black Tuesday,” the market lost 13 percent and 12 percent, respectively.
In the late 1920s, banks lent large amounts of money to investors speculating in the stock market. When stock prices began to decline slowly in September and then sharply in October of 1929, there was yet another run on the banks. Investors couldn’t repay their loans, and consumers were worried they wouldn’t be able to access their money. This led to 25 percent unemployment and a 30 percent decline in GDP. The FDIC and the SEC were established as a result of the Great Depression to help restore consumer and investor confidence.
In 1940, the economy was expanding, as was consumer confidence. But as the US entered the war in 1941, the economy was profoundly impacted, and some of those impacts were lasting. Many production lines were re-tooled to produce ammunition and other war supplies, and consumers were encouraged to buy war bonds – basically, a loan to the government to fund a war. (If you have any in your possession, you should still be able to take them to the bank today in exchange for cash.) New plants were opened, too, and women went to work doing the jobs that previously were only done by men. During this time, the unemployment rate dropped from its peak of 25 percent during the Great Depression to just 1.2 percent in 1944. By the end of 1941, total bank assets totaled $91 billion.
This act in 1950 expanded the scope of the FDIC’s capabilities. The two significant changes were 1) the insurance limit was increased from $5,000 to $10,000; and 2) the FDIC was able to lend to any insured bank at risk of insolvency if the bank was an essential part of its community.
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1950s: Bank Holding Company Act of 1956
This act made two important changes to the banking world. First, it prohibited banks headquartered in one state from acquiring banks headquartered in another state unless permissible by law. Second, it prohibited banks from expanding into non-banking activities.
The 1960s were marked by tax cuts, Vietnam War spending, and new government programs. John F. Kennedy proposed a bill that would become the Revenue Tax Act of 1964. It reduced the top marginal tax rate from 91 percent to 77 percent. Although Kennedy was assassinated in 1963, his successor, Lyndon B. Johnson, signed the bill into law in 1964. Johnson introduced other key government programs that remain important today, such as Medicare and Food Stamps (now called SNAP). During the 1960s, the U.S. experienced economic growth thanks in part due to the war economy. Deposit insurance was also increased to $20,000 in 1969.
Although the 1970s is remembered as a tumultuous time economically, things could have been much worse. Inflation rose to 5.3% by 1970, along with various other troubling economic signs. As a result, Congress passed the Securities Investor Protection Act of 1970 which established the Securities Investor Protection Corporation (SIPC). The goal of the SIPC is to minimize damage due to brokerage firm insolvencies. Today, the SIPC guarantees $500,000 in securities and cash to investors. In 1974, deposit insurance was increased to $40,000.
The ECOA was a very important law that expanded economic opportunity for a number of groups. It made it unlawful for any creditor to deny someone on the basis of race, color, religion, national origin, sex, marital status, or age. One result of this law was that it gave women the right at the federal level to open their own bank accounts without the permission of their husbands. In addition, the law said that creditors were not permitted to disallow certain sources of income.
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1980s: Savings and Loan Crisis
During the 1980s and into the 1990s, over 1,000 savings and loan associations failed. These associations allow people to open savings accounts and in turn, lend the deposited money for various purposes. Many factors were to blame for the crisis, such as fraud, lack of proper risk assessment, and elimination of regulations. The major result was the passing of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This act created new enforcement agencies, including the Office of Thrift Supervision and the Federal Housing Finance Board. In 1980, deposit insurance was increased to $100,000.
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1990s: Dot-Com Bubble
Economic conditions appeared quite good for much of the 1990s. Unemployment declined throughout the decade with less volatility and inflation than in previous decades. The stock market saw unprecedented growth during this time as well, with more than 25 percent growth per year in the second half of the decade. The NASDAQ grew by more than 400 percent during that time, only to come crashing down with the start of the new millennium. The NASDAQ then fell 50 percent within a year of its February 2000 peak, and 78 percent by October 2002.
The Great Recession, which lasted from 2007 until 2009, was the largest financial meltdown since the Great Depression. Theories about the cause of the Great Recession include a run on the shadow banking system, the subprime mortgage crisis, and even house flippers, who may have helped create a housing bubble. Unemployment peaked at 10% in the US and GDP declined 4.8% in 2008-2009. The major policy change was Dodd-Frank, which created the Consumer Financial Protection Bureau (CFPB). Dodd-Frank also included Title XIV, which requires mortgage originators to lend only to borrowers who can repay their loans. In 2008, deposit insurance was increased to $250,000, where it remains today.
The 2010s was a decade some would call “boring” by economic standards. The U.S. (and the world) continued to recover from the great recession, and unemployment slowly fell after its peak of 10% in 2009. The end of the 2000s was also a year of slight deflation, but the U.S. returned to modest inflation in 2010. That continued throughout the decade. Although there would not be another recession during this time, GDP growth was also quite low, hovering around 2% most years.
The 2020s and Beyond: A New Age of Digital Banking
As we look forward to the years ahead, one trend that is only accelerating is the dawn of online banking. More and more online banks are appearing all the time, as more and more consumers digitizing their lives. It’s now possible to do most of your banking online, and nearly every online bank has a fully-functional mobile app. COVID-19 may have accelerated this trend, as people attempt to avoid physical contact. However, this trend isn’t one that is likely to subside with the end of COVID-19.
