VI. Panic of 1907 (Did the legislative response address the issues raised by the crisis?)
1. No lender of last resort. No federal discount window, no access to federal warehouse lines.
2. Largely unregulated Trust companies in NY provided financing on speculative stock
transactions. Further plagued by unscrupulous dealings with related parties and affiliates.
3. No federal deposit insurance.
4. Lack of nationwide reserve requirements. Pyramiding of reserves by country and reserve city
anks.
5. Abusive/co
upt director interlocks.
6. No impartial federal regulator to assess which troubled depository institutions should survive
crisis.
7. Panic of 1907 led to the enactment of the Aldrich Vreeland Act of 1908. This law authorized
the creation of the National Monetary Commission to study the feasibility and terms of a US
Central Bank. Political balancing took place between less populated agrarian states and those
with large u
an areas.
XXXXXXXXXXPujo Money Trust hearings led to public perception that control of the banking system
fell into the hands of a few wealthy financiers in NY.
9. Public outrage, as well as economic need for a central bank, led to the passage of the 1913
Federal Reserve Act.
10. Federal Reserve Act created the Federal Reserve System, including Board of Governors and 12
Federal Reserve Banks.
c. Regulation Q-- prohibited banks from paying interest on demand deposits and
authorized the FRB to regulate interest rates on savings accounts.
d. McFadden Act-provided and limited national banks to the same
anching rights
within their home states as state banks.
e. Holding Company regulation-1933 Act subjected bank holding companies and thei
anks to examination and regulation by the FRB. limited the holding company and
ank's transactions with affiliated firms.
f. Housing Legislation-
i. Federal Home Loan Bank Act of 1932 (counterpart to FRBanks, created system
of FHLBanks.
ii. Home Owners Loan Act of 1933-authorized chartering of federal savings
institutions to accept deposits and make residential mortgage loans.
iii. National Housing Act of 1934-created the FSLIC to insure deposits of savings
institutions.
g. Calomiris thesis-The Banking Act of 1933 went too far and did not address the root
cause of the Great Depression which he described as Unit Banking (perpetuated by
laws that prohibited
anch banking) and the Real Bills doctrine. ("Unit banking made
anks less diversified and thus exposed to location specific shocks.") His view was unit
anks were less competitive, less cost efficient, less profitable and thus had less
capital. Ba
iers to entry prevented productive competition. Support for unit banking
was popular in rural areas because the banks there had no choice but to lend to the
local farmers.
h. Gold Reserve Act of 1934-outlawed the private possession of gold, forcing individuals
to sell to the US Treasury. Executive Order made it a criminal offense for US citizens to
own or trade gold with exceptions for jewelry or collecting.