A History of the United States Federal Reserve

Predecessors of the United States Federal Reserve

The First Bank of the United States was created in 1791 at the urging of Founding Father and Secretary of the Treasury Alexander Hamilton. This was the fledgling nation’s first attempt to control banking in the United States, develop a national currency and have a central overseer of national economic policy.

From the beginning, however, the idea of a central bank had opponents. Many people, primarily in agrarian areas, thought that currency should not be nationally based and fought the idea of centralized national economic control. In 1811, the First Bank of the United States was not rechartered, and there was no central bank in the United States.

Congress decided to again create a central bank in 1816, chartering the Second Bank of the United States. It was recognized that without a central bank it was difficult to keep currency in check. However there were still many opponents. The charter of the Second Bank passed by a slim margin and when it came time for renewal in 1836 it failed to pass. This led to an almost thirty year period where there was no central national banking organization, known as the Free Banking Era.

In 1863, at the height of the Civil War the need for federal banking regulation was once again recognized. President Abraham Lincoln passed the National Banking Act, which created a system of national charters for banks within the United States and sought to develop a stable national currency.

Despite the reforms of the National Banking Act, the situation of banks and currency in the United States remained precarious. One of the chief concerns was bank panics, when people across the country would become worried about the state of the economy and seek to withdraw their accounts all at once, causing a run on currency and the defaulting of many banks who did not have the money at hand to pay back all of their clients.

Such a bank run in 1893 caused the severest depression in the United States to that date. Another serious run occurred in 1907 (known as the Panic of 1907), causing the United States government to take a new look at national banking policies and develop a system that would more greatly ensure economic and monetary stability in the United States.

Federal Reserve Act, 1913

The solution found was the Federal Reserve Bank. The solution came after years of work, based on ideas borrowed from European systems as well as the work of bankers within the United States. The plan of the Federal Reserve was initially proposed by banker Paul M. Warburg.

Despite the recognized need of a nationalized banking system to stabilize the economy, there were many opponents. Most notable was William Jennings Bryan who supported agrarian interests. They wanted the central bank to be under public rather than banker control. In developing the Federal Reserve system, President Woodrow Wilson as well as congressional Republicans had to create a system that would appeal to those who feared centralization but recognized its need.

The Federal Reserve system proposed would have a centralized head, however it would also be composed of 12 national banks spread across the country, thus diverting all control from the Northeast. This appeased southerners and westerners who feared the power that was held in the Northeast, primarily New York.

Thus, a decentralized central bank was to formed. It was a compromise between the needs of bankers as well as populist oriented interests. Under the guidance of new President Woodrow Wilson, then, the Federal Reserve Act was created and signed into law on December 23rd, 1913.

Creating the United States Federal Reserve

Although the Federal Reserve Act had been passed, this did not instantly create a fully functioning Federal Reserve System. The Reserve Bank Organizing Committee was formed, which included Treasury Secretary William McAdoo, Secretary of Agriculture David Houston and Comptroller of the Currency John Skelton Williams. To these three men were given the arduous task of creating the Federal Reserve.

The Committee completed its task in less than a year. By November 14th, 1914 all 12 Federal Reserve Banks were open and ready for business. These 12 banks, which remain in operation today, were situated in the following cities:

• Boston
• New York
• Philadelphia
• Cleveland
• Richmond
• Atlanta
• Chicago
• St Louis
• Minneapolis
• Kansas City
• Dallas
• San Francisco

The Federal Reserve is an independent organization of the United States government. Its decisions need not be ratified by the President, and it does not receive funding from Congress. This is designed to keep the Reserve as apolitical as possible, concerned only with the economic well-being of the United States.

For almost 100 years now, the Federal Reserve has been in operation. It remains the most important organization in the development of United States monetary policy, and is one of the key players in the guiding of the United States economy.