Banking and Finance Careers Background
Banking in the United States emerged immediately after the Revolutionary War. The First Bank of the United States was a federally chartered bank established to print money, purchase securities (stocks and bonds) in companies, and lend money. It also was responsible for establishing lending rules that state banks would have to follow. At the end of the 20-year charter, Congress refused to renew the First Bank’s charter because of concern about the power that the bank held. The bank was subsequently closed.
Another federal bank followed but only remained operational for four years before it suffered the same fate as the First Bank. With the demise of the federal banks, state banks quickly grew in power and size. Each bank was allowed to issue its own currency, which created an enormous fluctuation in the number of dollars actually in existence. This, in turn, influenced the value of each dollar.
If the bank produced too much money, or lent money and did not receive enough of it back, the bank would close and depositors would lose everything they had invested. This instability was a continual problem throughout the 1800s, but particularly from 1800 to 1863, an era known as the Wildcat Period.
In 1863–64, the government took steps that would eventually drive the banks’ currency out of use. The National Banks Act was passed to charter state banks, issue national currency, and eventually tax the usage of bank currency. The taxation effectively killed all but the national currency.
In 1913 Congress established the Federal Reserve. In response to a series of financial panics set off by the limited number of dollars being printed, the Federal Reserve was established to act as the government’s central bank. It was divided into 12 districts, with a board of governors to determine policy, supervise the fluctuation of currency reserves for banks, and print currency.
In 1792, the forerunner of the New York Stock Exchange was started, allowing investors to buy stocks (a portion or share of the company) and bonds (a loan note from a company or the government to an individual lending money). With few controls on the purchase of stocks and bonds, investors in the stock market were able to receive great profits from companies that performed well. Investors were able to buy stocks and bonds with as little as 10 percent down.
From 1919 until 1929, more than $50 billion of new stocks and bonds was sold to the public. By 1932 almost half were worthless. Stock purchases had over-inflated the value of the company stocks. When panic set in, the prices collapsed. The market crash of 1929 marked the beginning of the Great Depression, a period of economic crisis and low business activity that lasted through most of the 1930s. The market crash also led to the passage of the Securities Acts of 1933 and 1934, which greatly strengthened previously established methods of self-regulation and public disclosure. Each provision in these acts was directed at a previous abuse. The far-reaching Securities Act of 1933 provides for the full disclosure of all facts relating to new issues and is known as “the truth in securities” act. Because of the market crash, the government and industry representatives jointly acted to restore investor confidence in the securities markets.
In February of 1933, banks in Detroit failed. They had lent too much money without maintaining enough in reserves. The loans were risky and the amount paid back was too small to allow the banks to continue functioning. When news of this spread, people across the country lined up to withdraw their money before their banks failed as well. This created a bank run, in which people tried to withdraw more money than was available. There was not enough money in the banks to return every deposit to the depositor. President Franklin D. Roosevelt shut down the banks on March 3 of that year, declaring a bank holiday. The banks were not allowed to reopen until government inspectors had evaluated their books. The FDIC (Federal Deposit Insurance Corporation) was created in 1933 to establish government guarantees of the money deposited in banks.
The 1934 Securities Act established the Securities and Exchange Commission (SEC), a federal agency in charge of supervising the trading of securities and ensuring that self-regulation functioned properly. Under reform legislation, misrepresentation and manipulation of the financial markets became federal offenses. The securities industry itself accepted more fully the basic obligations and responsibilities for self-regulation. The 1938 amendments to the Securities Exchange Act of 1934 established the National Association of Securities Dealers (NASD). It was organized as the self-regulatory organization responsible for the over-the-counter securities market. The SEC oversees the self-regulation of NASD dealers, as well as members of the New York, American, and regional stock exchanges. Through these legislative measures, a new era in the stock and bond business began.
The growth of this industry since 1939 would not have been possible without the reforms achieved in the preceding years. Other difficulties arose over time, however, as many inexperienced people entered the stock market and the market itself began to grow rapidly. A lack of sophistication on the part of new investors and a lack of qualifications among many new brokers combined to create problems. A small stock boom erupted in 1961, with the prices of many obscure electronics and space-age stocks climbing to unreasonable heights, sometimes promoted by a few unscrupulous salespeople.
The speculative boom of 1961 collapsed dramatically in the sharp market break of May 28, 1962. Unlike the crash of 1929, however, this decline did not have a similar deadening impact upon overall business conditions. Also, many more individuals had purchased their stocks for long-term investment and were not overly concerned with the decline, which later proved only temporary.
In addition, a year before, Congress, realizing that important changes had taken place in the markets, had ordered what became known as the Special Study of Securities Markets. This review was conducted by a group of economists, lawyers, and brokers charged with taking a comprehensive look at the industry and suggesting ways in which investors might be better protected.
By the time several volumes of the monumental Special Study report were issued by the SEC, the brokerage community had already taken many important steps to improve standards and operations. The Special Study, with its 176 recommendations, did not uncover abuses such as were prevalent in the 1920s. Some of the findings, however, became the basis for new federal legislation. The 1964 Securities Acts extended disclosure requirements to thousands of companies not previously covered by federal and exchange regulations. Most of the important and large companies throughout the nation must now regularly publicize the pertinent facts about their sales and earnings. Previously, only those companies that had listed their securities on the exchanges were required to disclose and publish such information regularly. In addition, stricter standards were formally established for new people entering the securities business.
One continuing problem for Wall Street in the mid- 1980s was stock manipulation based on insider information (information not known to the investment public). The SEC, however, conducted well-publicized investigations of violations of its rules, applying a system of safeguards that had been made more sophisticated and strengthened since the SEC’s beginning in 1934. (In the 2000s, financial malfeasance by corporations and the investment industry again prompted the SEC to institute reforms to increase public confidence in investment markets. One of the major reforms it instituted required corporate chief executive officers to sign off on financial reports produced by their companies.)
On October 19, 1987, the New York Stock Exchange experienced a drop in stock prices far greater than the one in 1929. The Dow Jones Industrial Average had risen to a then all-time high level of 2,722 on August 25, having climbed almost 1,000 points in eight months. September saw a slight drop in the average, but nothing close to the drop that hit in October.
Over a three-day period from October 14 to October 16, 1987, the Dow Jones lost more than 261 points. On October 19, this downward spiral reached almost panic proportions as the Dow Jones Average dropped 508 points. This reduced the overall value of the stock market by more than 22 percent. In actual cash value, the loss was estimated at more than $500 billion.
Two government investigations and a New York Stock Exchange investigation looked into the causes of the crash and determined that, although no single flaw in the system was responsible, more safeguards against market fluctuations were needed. As a result of the investigations, the limit on movement of stock prices was set at 100 points. If prices move in a range greater than that, trading will be shut down for an hour. If there is larger fluctuation after trading restarts, then other time restrictions are applied on trading. Also, new restrictions on electronic trading (where machines are programmed to trade automatically) were imposed so that the machines are shut off after a 50-point movement either up or down. The market built back up in value after the crash, but many people withdrew their investments from the stock market and put them in what they considered less volatile markets.
A crisis also rocked the banking industry in the late 1980s. Savings and loan (S & L) institutions, also known as thrift institutions, once had the specific function of providing their customers with savings accounts and mortgages for home ownership. When banks were deregulated in the 1980s, however, investors began pulling their money out of the S & Ls because they could get better returns on their investments elsewhere. The S & Ls in turn tried to compete with commercial banks by investing their customers’ money in other potentially more lucrative markets, such as commercial real estate. But the bottom fell out of these markets, and the banks lost large quantities of money. Since customers’ deposits are insured by the Federal Deposit Insurance Corporation, it was the taxpayers who had to foot the bill for the bad investments of the banks in order to pay back the customers whose money was lost. The S & L crisis has been blamed on Congress, on the Reagan administration, and on unscrupulous bankers. The result was the closure of many banks and greater regulation to prevent the same kind of thing from happening again.
The early 1990s was a revolutionary period in banking as mergers and acquisitions swept the industry. Layoffs and mergers were rampant. While reorganization was necessary to keep up with emerging technology, major restructuring also was needed to face competition from investment firms and other financial companies. For example, AT&T entered the credit card market. Investment companies provided check writing and loan services. Even services central to traditional banks, such as payment processes, were invaded by nonbanking companies. The result is a fewer number of large banks offering diversified services and a larger number of small banks offering specialized services and products.
New banking regulations also characterized this decade. Most importantly, the Gramm-Leach-Bliley Act (often known as the Financial Modernization Act) was passed in 1999. It repealed the 1933 Glass-Steagall Act, which separated banking from the securities business. The Financial Modernization Act allowed banks to begin selling investment and insurance products and insurance companies, securities firms, and banks to merge and provide one-stop shopping for financial services.
Mergers continued through the early 2000s with the banking landscape changing almost daily. Top banks merged to form larger corporations that are more competitive within the global and technological marketplace.
Besides mergers, online banking is also changing the industry. Just a few years ago, only a few banks had Web sites; now all of the top 30 banks in the United States offer online banking in some form. More than 53 million people in the United States banked online in 2005, according to the Pew Internet & American Life Project.