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8-12 Money, Banking & Financial Institutions [CH 8

National Banking Act of 1863 created a new banking system of federally chartered
banks, supervised by the Office of the Comptroller of Currency, a department of the
U.S. Treasury.

state banks The Act of 1863 then led to two types of banks: state banks and national banks.
Commercial banks State banks are commercial banks chartered by individual states whereas national
chartered by individual banks are commercial banks chartered by the federal government. National banks tend
states. to be larger and engage in banking across state lines. Though the regulations affecting

national banks state and national banks vary slightly, in practice there is little difference between the
Commercial banks two from the viewpoint of the individual depositor or borrower.
chartered by the federal A bit of history. The day after Franklin D. Roosevelt (D) was sworn into office, he
government. issued Presidential Proclamation 2038, to convene a special session of congress to

address the problems of the depression. FDR, using President Woodrow Wilson’s (D)
Trading with the Enemy Act, then issued Presidential Proclamation 2039, ordering all
banks—already closed—to remain closed until March 8. FDR then issued
proclamation 2040 which extend the amount of time banks were kept closed. Because

the Trading with the Enemy Act applied only during wartime, and since the United
States was not at war, what FDR had accomplished was illegal; that is not in the
powers of the Presidency as declared by the United States Supreme Court. As
Congress was convened in special session, FDR urged Congress to pass an Emergency

Banking Act, amending the Trading with the Enemy Act to apply “during time of war
or during any other period of national emergency declared by the president” (text
revision in italics). Title I of the Emergency Banking Act sanctioned FDR’s order
extending the “bank holiday” after the fact.

Historians have recorded these bank holidays and banking reform measures as “sav
[ing] the whole system of credit and monetary exchange. However, FDR’s extended
bank holiday made life financially difficult for everybody. Banks needed permission
from the secretary of the Treasury to do anything. Business became reluctant to accept

checks because they would not clear and the merchant would not be paid. “Subway
tokens, stamps, and IOUs took the place of money,” observed historian Page Smith. In
contrast, during the banking panic of 1907, when J. Pierpont Morgan himself had taken
charge of a successful bank rescue operation, some banks did close their doors

temporarily, but they continued clearing checks so that people could pay bills; Morgan
maintained the mobility of deposits.
The Emergency Banking Act also authorized the twelve Federal Reserve Banks to
issue additional currency (printing of Federal Reserve notes NOT backed by gold but by

government bonds), which meant that the government could print as much money
(inflate the currency) as it wanted and not be limited by the amount of gold on hand.

Services Provided by Commercial Banks

The typical commercial bank could be described as a Full-service bank because of
the numerous services it offers its depositors—banks refer to their various services as
products. Commercial banks offer a variety of checking accounts and savings accounts
with varying limits and rewards, they offer personal and business loans, credit cards,

safe deposit boxes, tax-deferred individual retirement accounts (IRAs), discount
brokerage services, wire transfers (which permit immediate movement of funds by
electronic transfers to distant banks), and financial counseling. They can provide
customers with traveler's checks at a small fee and many of them offer overdraft

automated teller protection on their checking accounts for some of their depositors.
machine (ATM) Customers who need to make deposits or withdrawals when the bank is closed can
Electronic banking usually do this by using their bank issued automated teller machine (ATM) card. ATM
machine that permits machines may be found outside bank buildings, in freestanding kiosks, and in
customers to make cash
withdrawals, deposits, and supermarkets, shopping malls, and airline terminals. Networks of interlinked systems
transfers on a 24-hour such as MAC, CIRRUS, or TYME give users access to their hometown bank accounts
basis by using an access from ATMs across the country.
card. Competition among all financial institutions has forced banks to become more

customer and service-oriented in attracting business in either new customer deposits

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