The History of Banking in One Chart

By John J. Maxfield (@OneMarlandRoad)

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A Chart About Bank Failures

e is no more powerful force in the U.S. bank industry than the credit cycle the
ating pattern of booms and busts that gave us the Roaring Twenties and the
Depression; the housing bubble and the Financial Crisis. Nothing better capture
redit cycles savagery than the failures left in its wake. More than 17,000 banks
gone under since 1865, equating to an annual average of 115 over the past 150

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he National Banking Acts of 1863 & 1864

e starting point for any conversation about bank history is the Civil War, or, to
more precise, the National Banking Acts of 1863 and 1864. These created the
nk system we know today by (1) monopolizing the printing of bank notes
., issuing money) by the federal government, and (2) providing a mechanism
ough which banks could acquire national, as opposed to state, charters.

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he Gilded Age: The Civil War to the Panic of 1907

Gilded Age, a term coined by Mark Twain, was a particularly volatile episode
ank history. Thanks to rapid economic expansion fueled by the American indust
olution as well as lax regulatory oversight, bank failures became a common
urrence. Two crises in particular, the Panics of 1873 and 1893, ignited full-blown
nomic depressions.

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913: Creation of the Federal Reserve

Federal Reserve was created in 1913 in an effort to reduce, if not stop, the frequ
urrence of banking panics. To this end, it was empowered to lend hard currency t
ks besieged by depositors withdrawing their money en masse. The theory was
, by providing access to all the currency sound banks needed to meet withdrawa
uests, it would remove depositors incentive to run on banks in the first place.

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Agricultural Depression of the 1920s

r World War I ended, the demand for American agricultural products plunged
ughout Europe. Farmers on the continent were again free to produce crops and
warring parties no longer needed the profusion of supplies to feed their armies.
es for corn, tobacco, and other crops plummeted in the U.S., taking thousands of
all rural banks down too, as farmers could no longer afford to service their loans.

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he Great Depression of the 1930s

owing a decade of excess throughout urban America, the stock market crashed i
9. In an effort to calm global markets and maintain the international gold standa
Federal Reserve unwittingly aggravated the situation by raising interest rates an
ting the money supply. The Great Depression followed, leaving more than 5,000
ed banks in its wake.

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The Great Moderation: 1945-1975

nk historians call the unusually quiet period from the end of World War II to the m
70s the Great Moderation. Few banks failed over this stretch thanks to (1) increas
ulatory oversight under FDRs New Deal legislation, (2) heightened conservatism
ong bankers with firsthand experience of the Great Depression, (3) rapid econom
ansion following the war, and (4) the introduction of national deposit insurance.

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he OPEC Oil Embargos of 1973 & 1979

Cs twin oil embargoes in the 1970s, a response to Americas support for Israel in
3 Yom Kippur War, set off a series of events that changed banking forever. Most
ortantly, high oil prices accelerated inflation, which then caused the Federal Rese
aise short-term interest rates to nearly 20%. This triggered a deep recession in 19
caused banks to hemorrhage net interest income.

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The 1980s: A Most Volatile Decade

1970s turmoil culminated in 3 distinct financial crises a decade later. (1) An ene
s fueled by high gas prices led to the first too-big-to-fail bank, Continental Illinois
ch was nationalized by the FDIC in 1984. (2) High funding costs from the Feds as
nflation yielded the S&L Crisis. (3) And the recycling of petrodollars from oil prod
loans to Latin American governments caused the Less Developed Country Crisis

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1990s: The Mergers of Equals

n effort to make the bank industry more resilient to regional economic downturn
the stiflingly high short-term interest rates of the 1980s, Congress deregulated t
ustry by, among other things, allowing banks to operate across interstate lines on
onwide basis for the first time in history. This sparked a wave of bank mergers
ergers of equals that gave us the coast-to-coast branch networks we know tod

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The Financial Crisis of 2008-09

s own, the financial crisis of 2008-09 seems to pale in comparison to the severity
e combined crises of the 1980s to say nothing of the Great Depression. But bec
me on the heels of the 1990s merger wave, the banks that did fail were almost
cognizably massive compared to earlier periods. Thanks to imprudent bets on
rime mortgages, more than 500 lenders have since ceased operations.

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