Historical events that shaped banking

0:00- [Instructor] In this video, we're gonna talk about some major historical events that have shaped banking, and especially banking in the United States in modern times. So let's go back a little over 100 years ago to 1907. And you have the situation where there were a few folks who tried to corner the market on a stock.

0:23They failed and that put their enterprises, their businesses, their financial institutions under risk. Well, you could imagine people wanted, the investors and what they were doing wanted their money back. It started to spread to the rest of the financial system.

0:38And it created a panic where a lot of financial system, a lot of financial institutions became weak because everyone, the investors especially, wanted to take their money out. Or even from banks, people wanted to take their money out. It ended up being bailed out by some of the big financiers, folks like J. P. Morgan.

0:58But it made people realize that we needed a central bank to shore up the financial system, especially to be a lender of last resort. And so most people, what would credit the 1907 panic to in 1913, the establishment of the US Federal Reserve or our central bank.

1:19So the Federal Reserve. Now we can fast forward a few more years, we have another panic. So this is 1910, 1920. And then 1929 might be a year that sounds familiar to you. If not, it will now. You now have a run-on banks. You also have a stock market crash. So let me just say, call this a bank run.

1:41And this was really what brought about the Great Depression, bank run. You have the stock market crash. People aren't sure about the strength of their financial institutions. They all go to their bank. The bank doesn't have all of the money ready and waiting for them.

1:56In many cases, it's lent out some of it. That's what fractional reserve lending is. And so bank failures happen, the economy crashes, not a good scenario. You essentially get into the Great Depression that goes all the way until the start of World War II, which was a very bad time for the United States.

2:14But it introduced a new idea and that's deposit insurance. So in 1933, 1933, you have, as part of the Glass-Steagall Act, you have the idea of Federal Depository Insurance Corporation, where your deposits in bank accounts up to a certain amount, and only if a bank is FDIC insured, are going to be insured.

2:38So if you have, let's say 20,000, well today, it would be say $20,000 in the bank and the limits are much higher than that now. And if that bank were to go under, the FDIC would still make sure that you are made whole. So this would make it much less likely for you to have run-on banks.

2:57Now we can keep going and I'm skipping over a lot of history here. I'm really just talking about the big events. But if we go into the '40s, '50s, obviously from '40 to '45 is roughly the period of World War II. We enter it not at the beginning, but we enter into a little bit after that.

3:13And then, it's done by 1945. Then, we have things like the Korean War. I won't go into all of the history, '50, '60. And then as we go into the '70s, this is a period, I should do that in the yellow color since that's the worrisome one. This right over here, so this is 1960, 1970, 1970 to 1980, we have high inflation.

3:40I'm talking about double-digit inflation in many years. So things are getting more expensive. And actually you have stagflation in much of that time where the economy is actually contracting at the same time that you have high inflation, another very bad time for the US.

3:57And then as we get into the early 1980s, the Federal Reserve chairman, Paul Volcker, he decides to be very aggressive and try to break the back of inflation. So he raises inflation rate, or I should say, he raises interest rates by a large amount to break inflation.

4:14And so Volcker here, let me make sure I'm spelling it right, C-K-E-R, V-O-L-C-K-E-R. He really showed the importance and he was successfully able to do it. It wasn't a a popular thing to raise interest rates that much, but he was able to bring inflation down. And ever since then, people have taken inflation very, very, very seriously.

4:40And that really comes from what Paul Volcker was able to pull off. Now you keep fast forwarding. We can go to obviously a major geopolitical issue, which is you have the attacks on September 11th in 2001. And even though this wasn't directly a financial attack, you could imagine that it made people more worried about how robust is the financial system and stock markets and cybersecurity and make sure that bad actors in the world aren't able to move money around to fund their bad operations.

5:15So you see a lot more tight security, anti-money laundering laws and regulations go into effect, tighter cybersecurity, et cetera. So it's just people became much more thoughtful about how even money, how we can stabilize things when you have a major attack, and also how money can be controlled a little bit more to prevent bad actors from funding things like that.

5:39Now, you fast forward a little bit more, you go to 2008, and we have the Great Recession, 2008. And this was following a period where not only were interest rates relatively low, but you have mortgage loans becoming more and more accessible. And we have other Khan Academy videos that go into detail about why that might have happened.

6:05But people were giving mortgages where you didn't need significant down payments, in some cases, no down payment. There were people with higher credit risks. And then all of a sudden, especially when housing prices started to go down, you start having a lot of foreclosures, you start having a lot of banks that are entering into a tough situation and the government had to come in and bail out a lot of these banks and make sure you had a stable financial system.

6:30Now, last but not least, you get to 2020. And I am sure many of you remember the COVID-19 pandemic, pandemic. And once again, even though this wasn't directly a financial attack or financial crisis, it made governments do unprecedented intervention to prop up the economy.

6:52'Cause you could imagine as soon as governments around the world are telling everyone to stay home, they're not going to restaurants, they're maybe not buying as much, a lot of things get disrupted. There was a fear that you were going to have a major recession or even depression.

7:06So central banks cut interest rates. There's an acceleration of digital banking. As you can imagine, people couldn't do as much, let's call it physical transactions or physical banking anymore. And so it really showed how globally governments, both central banks and the federal governments, could act very aggressively to try to prop up the economy.

7:27And for the most part, at least from where we're sitting now, it seems like it was successful, given how large the shock of shutdowns due to the pandemic really were.