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Three Problems Solved by the McFadden Act

March 27, 2014 by · Leave a Comment 

Written by Phin Upham

By the middle of the 1920s, the Federal Reserve System was working full steam. It was helping to push economic growth and keep interest rates relatively stable. Even gold reserves had risen, helping to propel the Federal Reserve note to the top of the world’s currency. There were three issues that banks had to contend with in those days, which the McFadden act sought to solve.


There was a concern that bank charters, which were set to about twenty years, would run out and the Fed would not renew them. Bankers and legislators of the time remembered that the Fed refused to re-charter the First and Second Banks of the United States. The McFadden Act re-chartered these banks seven years prior to their expiration debt, and made those charters permanent. Had they waited until the scheduled time to consider renewal, they would have been in the throes of the Great Depression.


State banks were, depending on the laws of each state, allowed to operate multiple branches within the state. National banks were not afforded the same allowances, which threatened the competitive nature of the financial industry. The McFadden Act made it possible for national banks to operate branches within any state that permitted that type of business.


The McFadden Act also revised a range of banking laws to create a more competitive atmosphere in general. The belief at the time was that banks, which had been conservative leading up to the roaring-twenties, should be allowed to operate with more risk. The Act made it legal for banks to operate subsidiaries, and expanded the size of loans that Federal Reserve lenders could make.

Phin Upham is an investor from NYC and SF. You may contact Phin on his Twitter page.

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