Abraham Lincoln's Union government during the Civil War solved the problem of a chaotic currency and at the same time the more pressing problem of how to finance the war. The solution, introduced in 1863, was to get the federal government back into the business of chartering banks. The new national banks, like free banks under earlier state laws, would issue a uniform national currency printed by the government and backed by US bonds. National banks had to purchase the bonds to back bank notes they issued, making it easier for the Lincoln administration to sell bonds and finance the war against the Southern confederacy. National bank currency would be safer than state bank notesif a bank defaulted or failed, the US bonds backing them could be sold to pay off holders of the failed bank's notes. In effect, national bank notes were a liability of the federal government, not the bank. Discounts on bank notes, a problem of the previous era, disappeared, improving the national payments system.

The intent of the National Bank law was that the old state banks would convert to national charters. But not all of them did, so Congress in 1865 passed a prohibitive tax on state bank notes. That ended the issue of state bank notes. But it did not end state-chartered banking because many state banks could continue as deposit-taking banks without issuing notes. Shortly after the Civil War most US banks were national banks. But by the end of the nineteenth century, state banking had recovered sufficiently to rival national banking. The United States had what came to be called a "dual banking system" of national and state banks, and the system persisted into the twenty-first century. National bank notes, however, disappeared in the 1930s, replaced by today's national currency, Federal Reserve Notes.

During the half century from 1863 to 1913, the country continued to be without a central bank. It had a uniform national currency and a better banking system than the one before 1863, but it was still prone to financial instability. Banking panics occurred in 1873, 1884, 1893, and 1907. The last was especially embarrassing because by 1907 the US economy was the largest in the world, as was the US banking system. There were about 20,000 banks in 1907, and there would be 30,000 by the all-time peak in the early 1920s. US bank deposits were more than a third of the total world deposits, and approximately the same as the combined deposits of German, British, and French banks, the next three largest systems. The European countries had central banksbankers' banksthat could lend to banks under stress, and as a result they had fewer banking crises than did the United States.

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So in 1913, after three-quarters of a century without a central bank and a period punctuated by a number of banking crises, Congress created a new central bank, the Federal Reserve System (the Fed). The Fed was organized in 1914, and by the end of the year the twelve regional Reserve Banks, coordinated by the Federal Reserve Board in Washington, DC, were open for business. The new system was a decentralized central bank in keeping with the long American tradition of not wishing to have concentrated financial power in either Wall Street or Washington, DC.

The Fed further improved the payments system by operating a national check-clearing system. It also introduced Federal Reserve Notes, which gradually replaced national bank notes and Treasury-issued currency, making the national currency still more uniform. The Fed also had the power to expand and contract its currency and credit, which served to reduce seasonal fluctuations in interest rates, enhancing economic stability.

As we know from recent experience, the Fed did not eliminate banking crises. But crises were far less frequent than when there was no central bank. Indeed, there have been only two major banking crises in ninety-six years, 1930-1933 and 2007-2009. Or possibly three if we add the savings-and-loan (S&L) crisis of the 1980s, although S&Ls at the time of the crisis were not considered to be banks and had their own set of regulators. (In the wake of that crisis the S&Ls that survived essentially became banks.) Earlier in US history, in the forty years when the two Banks of the United States existed, there was only one banking crisis, in 1819. Compared to the seventy-eight-year period from 1836 to 1914, which witnessed seven banking crises, the two eras of central banking look pretty good: a crisis once every thirty to forty years on average, instead of once every eleven years. The presence of a central bank with a mandate to lend to solvent but illiquid banks and to the money and capital markets in times of stress enhanced financial stability and reduced the incidence of banking crises.

The Fed, however, rather infamously did little to prevent the failure of thousands of US banks in the period 1930-1933, a lapse that contributed to making the Great Depression of the same years the worst economic slump in American history. The reasons for the lapse are still not clear. Some historians contend that decisive action to prevent the contagious failure of so many banks was impossible because the leadership of the Fed was weak and divided. The Board in Washington disagreed with some of the regional Reserve Banks on what actions to take, and the regional banks disagreed with one another. Others say that the Fed thought it had to defend the convertibility of the dollar to gold, which led it to contract rather than expand credit during critical periods of the slide into the Great Depression.

In the wake of the Depression, President Franklin Roosevelt's "New Deal" administration sponsored a number of important banking reforms. Roosevelt's first action in March 1933 was to close all of the nation's banks, the so-called Bank Holiday, and then he assured the nation that when banks re-opened the public would not have to worry about their solvency. The Banking Act of June 1933, often called the Glass-Steagall Act because of its chief congressional sponsors, introduced federal deposit insurance, federal regulation of interest rates on deposits, and the separation of commercial banking from investment banking. The Banking Act of 1935 essentially created the Fed as we know it today. It strengthened the central bank's powers and made them less decentralized than they had been during the Fed's first two decades.

New Deal banking reforms ushered in a long period of banking stability lasting from the 1930s to the 1980s. That stability, however, was purchased at the cost of making American banking less competitive, less innovative, and more regulated than it had been before the 1930s. It became increasingly clear by the 1960s and 1970s that heavily regulated commercial banking was losing market share in finance to the less regulated and more innovative institutions and markets of Wall Street. An example of this was the money market mutual fund. It provided depositors with the option of earning the high, unregulated interest rates of Wall Street's money market instruments instead of the lower regulated rates that could be paid by commercial banks and S&Ls. That led bank depositors to withdraw funds from the banking system and place them in money market funds, a process called "disintermediation." The markets of Wall Street gained, and the banking system became a smaller and smaller component of the overall financial system.

Banks and their political supporters responded by calling for deregulation. The New Deal's ceilings on deposit interest rates were repealed in the 1980s. So were some of the regulations that prevented S&Ls from competing with banks. Congress removed long-standing restrictions on interstate banking in 1994. Bank mergers, once suspect for reducing competition, were increasingly allowed. Today the country has far few independent banks than in the past, about 8,000. But many of the remaining banks have a large number of branches and even more ATMs. Americans now are never very far from a banking facility.

In 1999, Congress repealed the Glass-Steagall Act that had effectively separated commercial and investment banking. The business of banking, long stifled by regulation, suddenly became more exciting. Increasingly, banks were not limited in their lending by the size of their deposit bases. They could obtain more funding to make more loans and purchase new forms of securities by accessing the Wall Street and international money markets.

In retrospect deregulation may have led banking to become too exciting for its own good and that of the country. In the early 2000s, cheap credit led to a housing and commercial real estate boom that turned into a bubble. Assumingcontrary to historical experiencethat home prices could not go down, banks and other lenders made numerous mortgage loans on liberal and increasingly innovative terms. They also increased their investments in mortgage-backed securities created by Wall Street banks. When, in the middle of the decade, house prices stopped rising and began to fall, increasing numbers of borrowers defaulted on their mortgage loans, causing steep drops in the values of mortgage-backed securities.

Banks holding mortgage loans and mortgage-backed securities were in trouble. The decline in the value of the assetsthe loans and securities on their balance sheetsthreatened to wipe out their capital and make them insolvent. Unlike the 1930s, depositors did not panic and rush to withdraw their funds from banks because now they were protected by federal deposit insurance. But money market lenders had no such insurance, and they began to refuse to lend to the banks. In 2007, and even more in 2008, market funding for banks dried up. Only massive interventions by the Fed and the US Treasury prevented a catastrophic banking and financial crisis on the order of that of the early 1930s. As we know, the crisis has been a bad one. But it could have been a lot worse if the Fed and other financial authorities had acted as they did in the Great Depression.

As this is written, Congress is in the process of reconciling differences between the financial reform bills that the House and Senate have passed. The outcome will lay the groundwork, as did the 1930s banking reforms, for the next chapter in the long history of the American banking system. Like the reforms introduced during the Lincoln administration in the 1860s and the Roosevelt administration in the 1930s, the reforms that are now emerging under the Obama administration are sure to increase government oversight of the banking system. But if history is any guide, these reforms will not put an end to banking crises.

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question five

1.Company A" has decided to launch a new product into a new market. Competition is very intense and the market is attractive. Which marketing strategy should the company adopt in order to launch its product?

2.Company A" wants to start manufacturing a new product during the current year in order to expand its product range. It also intends to use a strategy of quality differentiation from its competitors. Which product strategy is it going to adopt?

3.The main objective____________ of a company's pricing strategy is_____________

4.As participants in__________ the distribution process, providers of functional services____________

5.According to the message type,_{_______________} advertising can be_______________

6.The strategy to improve__________ the quality of the product is specific to___________

7.The main marketing objective for a product in the growth stage of its life cycle must be

8.Which of the following is not a component of the company's microenvironment__________

9.The market information function of marketing is______________

10.Competition between two companies that offer identical products meant to meet the same needs is called________________