Introduction to Finance

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C H A PT E R 3 Banks and Other Financial Institutions
State Banks from 1836 to the Civil War 
When the Second Bank’s charter 
expired, the excesses that had plagued the period between 1811 and 1816 began again. This 
period is characterized as one of “wildcat” banking.
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Although many state banks operated on 
a conservative and very sound basis, the majority engaged in risky banking practices through 
excessive note issues, lack of adequate bank capital, and insuffi
cient reserves against their 
notes and deposits.
Because the notes of even well-established banks were often of inferior quality, it was 
easy for skillful counterfeiters to increase the denomination of notes. Also, because of the 
poor communications that existed between various sections of the country, it was often quite 
diffi
cult for a banker to be certain whether notes presented for payment were real. Skillfully 
prepared counterfeit notes frequently circulated with greater freedom than did the legitimate 
notes of weak and little-known banks.
In spite of the many abuses of state banks during this period, New York, Massachusetts, 
and Louisiana originated sound banking legislation, much of which provided the basis for the 
establishment of the National Banking System in 1863.
Entry of Thrift Institutions
The chaotic banking conditions of the early 1800s left individuals with few safe institutions in 
which they could place their savings. The lack of safe depository institutions, in turn, inhibited 
the eff ective development of home fi nancing. The rapidly growing population depended to a 
large extent on individual fi nancial arrangements to meet its need for housing. The accumu-
lated savings of most individual home buyers, then as now, were simply not enough to buy a 
house. In response to this problem, two new forms of depository institutions, known as 
thrift 
institutions
, came into being: savings banks and savings and loan associations. Credit unions 
developed later.
3.5
Regulation of the Banking System
The purpose of this section is to provide a brief review of major legislation that has shaped 
the development of the U.S. banking system. We separate our discussion into general banking 
legislation, the savings and loan crisis, and legislation enacted to protect depositors’ funds.