History of central banking in the United States
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Banking in the United States |
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This history of central banking in the United States encompasses various
1781–1836: Bank of North America and First and Second Bank of the United States
Bank of North America
Some Founding Fathers were strongly opposed to the formation of a national banking system; the fact that England tried to place the colonies under the monetary control of the Bank of England was seen by many as the "last straw"[verification needed] of oppression which led directly to the American Revolutionary War.[citation needed]
Others were strongly in favor of a national bank. Robert Morris, as Superintendent of Finance, helped to open the Bank of North America in 1782, and has been accordingly called by Thomas Goddard "the father of the system of credit and paper circulation in the United States".[1] As ratification in early 1781 of the Articles of Confederation had extended to Congress the sovereign power to generate bills of credit, it passed later that year an ordinance to incorporate a privately subscribed national bank following in the footsteps of the Bank of England. However, it was thwarted in fulfilling its intended role as a nationwide national bank due to objections of "alarming foreign influence and fictitious credit",[1] favoritism to foreigners and unfair policies against less corrupt state banks issuing their own notes, such that Pennsylvania's legislature repealed its charter to operate within the Commonwealth in 1785.
First Bank of the United States
In 1791, former Morris aide and chief advocate for Northern mercantile interests,
Second Bank of the United States
After five years, the federal government chartered its successor, the
1837–1862: "Free banking" era
Period | % change in money supply | % change in price level |
---|---|---|
1832–37 | +61 | +28 |
1837–43 | −58 | −35 |
1843–48 | +102 | +9 |
1848–49 | −11 | 0 |
1849–54 | +109 | +32 |
1854–55 | −12 | +2 |
1855–57 | +18 | +1 |
1857–58 | −23 | −16 |
1858–61 | +35 | −4 |
In this period, only
During the free banking era, the banks were short-lived compared to today's commercial banks, with an average lifespan of five years. About half of the banks failed, and about a third of which went out of business because they could not redeem their notes.[5] (See also "Wildcat banking".)
During the free banking era, some local banks took over the functions of a central bank. In New York, the New York Safety Fund provided deposit insurance for member banks. In Boston, the Suffolk Bank guaranteed that bank notes would trade at near par value, and acted as a private bank note clearinghouse.[citation needed]
1863–1913: National banks
The
, included provisions:- To create a system of Comptroller of the Currencywas created to supervise these banks.
- To create a uniform national counterfeiting.
- To finance the war, national banks were required to secure their notes by holding ] liquidity.
As described by
Two problems still remained in the banking sector.[citation needed] The first was the requirement to back up the currency with treasuries. When the treasuries fluctuated in value, banks had to recall loans or borrow from other banks or clearinghouses. The second problem was that the system created seasonal liquidity spikes. A rural bank had deposit accounts at a larger bank, that it withdrew from when the need for funds was highest, e.g., in the planting season. When combined liquidity demands were too big, the bank again had to find a lender of last resort.[citation needed]
These liquidity crises led to bank runs, causing severe disruptions and depressions, the worst of which was the Panic of 1907.[citation needed]
National banks issued
Congress suspended the gold standard in 1861 early in the Civil War and began issuing paper currency (greenbacks). The federally issued greenbacks were gradually supposed to be eliminated in favor of national bank notes after the Specie Payment Resumption Act of 1875 was passed. However, the elimination of the greenbacks was suspended in 1878 and the notes remained in circulation. Federal debt throughout the period continued to be paid in gold. In 1879, the United States had returned to the gold standard, and all currency could be redeemed in gold.[8]
1907–1913: Creation of the Federal Reserve System
Panic of 1907 alarms bankers
Early in 1907, New York Times Annual Financial Review published
Bankers felt the real problem was that the United States was the last major country without a central bank, which might provide stability and emergency credit in times of financial crisis. While segments of the financial community were worried about the power that had accrued to
Aldrich Plan
Rhode Island Senator
A regional Federal Reserve system
The new President, Woodrow Wilson, then became the principal mover for banking and currency reform in the 63rd Congress, working with the two chairs of the House and Senate Banking and Currency Committees, Rep. Carter Glass of Virginia and Sen. Robert L. Owen of Oklahoma. It was Wilson who insisted that the regional Federal Reserve banks be controlled by a central Federal Reserve Board appointed by the president with the advice and consent of the U.S. Senate.
Agrarian demands partly met
William Jennings Bryan, now Secretary of State, long-time enemy of Wall Street and still a power in the Democratic Party, threatened to destroy the bill. Wilson came up with a compromise plan that pleased bankers and Bryan alike. The Bryanites were happy that Federal Reserve currency became liabilities of the government rather than of private banks—a symbolic change—and by provisions for federal loans to farmers. The Bryanite demand to prohibit interlocking directorates did not pass. Wilson convinced the anti-bank Congressmen that because Federal Reserve notes were obligations of the government, the plan fit their demands. Wilson assured southerners and westerners that the system was decentralized into 12 districts, and thus would weaken New York City's Wall Street influence and strengthen the hinterlands. After much debate and many amendments, Congress passed the Federal Reserve Act or Glass–Owen Act, as it was sometimes called at the time, in late 1913. President Wilson signed the Act into law on December 23, 1913.
Since 1913: The Federal Reserve
The Federal Reserve System, also known as the Federal Reserve or simply as the Fed, is the central banking system of the United States today. The Federal Reserve's power developed slowly in part due to an understanding at its creation that it was to function primarily as a reserve, a money-creator of last resort to prevent the downward spiral of withdrawal/withholding of funds which characterizes a monetary panic. At the outbreak of World War I, the Federal Reserve was better positioned than the United States Department of the Treasury to issue war bonds, and so became the primary retailer for war bonds under the direction of the Treasury. After the war, the Federal Reserve, led by Paul Warburg and New York Governor Bank President Benjamin Strong, convinced Congress to modify its powers, giving it the ability to both create money, as the 1913 Act intended, and destroy money, as a central bank could.
During the 1920s, the Federal Reserve experimented with a number of approaches, alternatively creating and then destroying money which, in the eyes of Milton Friedman, helped create the late-1920s stock market bubble and the Great Depression.[10]
After
The Federal Reserve's monetary powers did not dramatically change for the rest of the 20th century, but in the 1970s it was specifically charged by Congress to effectively promote "the goals of maximum employment, stable prices, and moderate long-term interest rates" as well as given regulatory responsibility over many consumer credit protection laws.
Since the
See also
- Bank of Amsterdam (New Netherland, 1614–1667; Dutch Virgin Islands, 1625–1650)
- Bank of England (Thirteen Colonies, 1694–1776; Rupert's Land, 1694–1811; North-Western Territory, 1694–1870; East Florida and West Florida, 1763–1783; Indian Reserve, 1763–1783; Quebec, 1763–1783; New Ireland, 1779–1783 & 1814–1815; Columbia District, 1810–1846; Red River Colony, 1811–1818; Stickeen Territories, 1862–1863; Colony of British Columbia, 1858–1866; Colony of British Columbia and Vancouver Island, 1866–1871; Province of British Columbia, 1871–1903)
- Banque Générale/Banque Royale (French Louisiana, 1716–1720)
- Bank of Spain (New Spain, 1782–1821; Captaincies General of the Philippines and Puerto Rico, 1821–1898)
- Russian America, 1860–1867)
- Danmarks Nationalbank (Danish West Indies, 1818–1917)
- Reichsbank (German New Guinea, 1884–1919)
Further reading
- Calomiris, Charles W.; Jaremski, Matthew (2022). "Why Join the Fed?" The Journal of Economic History.
- The Creature from Jekyll Island: A second look at the Federal Reserve, by G. Edward Griffin. 5th Edition in 2010(First publish 1994, now in its 45th reprint, also available in Chinese, German and Japanese)
- The Formative Period Of The Federal Reserve System (During the World Crisis) by W.P.G. Harding, A.M., LL.D. Former Governor of the Federal Reserve Board (New York & Boston: Houghton Mifflin Company, 1925)
References
- ^ ISBN 9780470946589.
- ISBN 0-06-059896-4.[page needed]
- ^ US Constitution, Article 1, Section 8. https://constitution.congress.gov/constitution/article-1/#article-1-section-8
- ^ Remini, Robert V (1988). The Life of Andrew Jackson. New York: Harper & Row, p.274
- ^ Shaffer, Daniel S. (2005). Profiting in Economic Storms. New Jersey: Wiley & Sons. p. 102.
- ^ Federal Reserve Bank of Minneapolis (July 2006). New Evidence on State Banking Before the Civil War (PDF). Federal Reserve Bank of Minneapolis.
- ISBN 978-0691041476.
- ^ Friedman & Jacobson Schwartz (1963), p. 24.
- ISBN 9781568584911.
- ^ Friedman, Milton & Friedman, Rose (1980). "Chapter 3: The Anatomy of a Crisis". Free to Choose.
This article includes a list of general references, but it lacks sufficient corresponding inline citations. (October 2011) |
Bibliography
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- Broz, J. Lawrence (1997). The International Origins of the Federal Reserve System. Ithaca, New York: Cornell University Press.
- Carosso, Vincent P. (1973). "The Wall Street Trust from Pujo through Medina". Business History Review. 47 (4): 421–437. S2CID 154895813.
- Federal Reserve Bank of Minneapolis. "A History of Central Banking in the United States". Federal Reserve Bank of Minneapolis.
- Flaherty, Edward. "A Brief History of Central Banking in the United States". Archived from the original on December 13, 2004.
- ISBN 978-0691003542.
- Goddard, Thomas H. (1831). History of Banking Institutions of Europe and the United States. Carvill. pp. 48ff.
- OCLC 122973403.
- Greider, William (1989). Secrets of the Temple: How the Federal Reserve Runs the Country.
- Herrick, Myron T. (January–June 1908). "The Panic of 1907 and Some of Its Lessons". Annals of the American Academy of Political and Social Science. 31.
- Kindleberger, Charles P. (2002). Manias, Panics, and Crashes (4th ed.). Basingstoke: Palgrove. ISBN 9780333970294.
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- Link, Arthur (1962). Wilson: The New Freedom.
- Livingston, James (1986). Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913.
- Markham, Jerry (2001). A Financial History of the United States. Armonk: M.E. Sharpe. ISBN 0-7656-0730-1.
- Marrs, Jim (2000). "Secrets of Money and the Federal Reserve System". Rule by Secrecy: The Hidden History that Connects the Trilateral Commission, the Freemasons, and the Great Pyramids. New York: HarperCollins. pp. 64–78.
- Martin, Justin (2000). Greenspan: The Man behind Money. OCLC 45188865.
- ISBN 978-0226520001.
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- A History of Money and Banking in the United States: The Colonial Era to World War II.
- Sebok, Miklos (2011). "President Wilson and the International Origins of the Federal Reserve System—A Reappraisal". White House Studies. 10 (4): 424–447.
- Shull, Bernard (2005). The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence. Westport, Connecticut: Praeger.
- ISBN 978-1-620-40292-4.
- Steindl, Frank G. (1995). Monetary Interpretations of the Great Depression.
- Sumner, Scott B. (2021). The Money Illusion: Market Monetarism, the Great Recession, and the Future of Monetary Policy. Chicago: ISBN 978-0226773681.
- ISBN 978-1-59813-150-5.
- Wells, Donald R. (2004). The Federal Reserve System: A History.
- West, Robert Craig (1977). Banking Reform and the Federal Reserve, 1863-1923.
- Wicker, Elmus R. (1966). "A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression". Journal of Economic History. 26 (2): 223–238. S2CID 154805899.
- Wells, Wyatt C. (1994). Economist in an Uncertain World: Arthur F. Burns and the Federal Reserve, 1970–1978. New York: ISBN 978-0231084963.
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External links
- Documents of the First Bank of the United States
- Documents of the Second Bank of the United States
- The Origins of the Federal Reserve by Murray N. Rothbard
- A History of Central Banking in the United States published by the Federal Reserve Bank of Minneapolis
- Historical Beginnings... The Federal Reserve from the Federal Reserve Bank of Boston
- Documents of the Reserve Bank Organization Committee. Committee created by the Federal Reserve Act, charged with dividing the nation into reserve districts. Includes: decision of the Reserve Bank Organization Committee determining the Federal Reserve districts and the location of Federal Reserve Banks; hearings held at potential reserve bank cities; other reports, bulletins, and circulars.