History and Origin of United States Central Bank-Federal Reserve Bank

United states central bank received it’s charter in 1791 from the U.S. Congress and was signed by president Washington. The Banks charter was designed by secretary of the Treasury Alexander Hamilton, modeling it after the Bank of England, the British bank.

It was established in 1668 as a joint-stock bank, and it was chartered to lend the government funds and to act as a clearinghouse for commerce. A few decades later (1694), the most famous central bank of the era, the Bank of England, was founded also as a joint-stock company to purchase government debt.

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While these early central banks helped fund the government’s debt, they were also private entities that engaged in banking activities. Because they held the deposits of other banks, they came to serve as banks for bankers, facilitating transactions between banks, or providing other banking services.

ORIGIN OF THE UNITED STATES CENTRAL BANK – FEDERAL RESERVE BANK

The history of central banking in the United States did not begin with the Federal Reserve. The Bank of the United States received its charter in 1791 from the U.S. Congress and was signed by President Washington. The Bank’s charter was designed by Secretary of the Treasury Alexander Hamilton, who was highly instrumental to the formation of the First National Bank in America, modeling it after the Bank of England – the British Central Bank. Alexander Hamilton proposed the Bank of the United States in 1790, and it opened the following year.

The Bank of the United States was located in Philadelphia, Pennsylvania, within Independence National Historical Park, the structure was completed in 1797 and stands today as a National Historic Landmark. It was one of four major financial innovations at the time, including the U.S. government’s assumption of the state war debts, the establishment of a mint, and the imposition of a federal excise tax. These measures aimed to establish financial order, national credit, and resolve the issue of fiat currency.

However, the first attempt to having an American central bank was short-lived, this was because the Bank encountered considerable controversy. Interests across various strata of the economy were opposed to the Bank on the grounds of ownership. They generally feared that the bank would favor commercial and industrial interests over their own and that it would promote the use of paper currency at the expense of gold and silver specie.

Years later, an attempt was made to re-established the Second Bank of the United States but was equally shorter-lived. Thus, the various attempts in establishing a Central Banking System in the United States of America failed. It should be noted that these central banks lasted a total of eight years before being forced to close by Congress.

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The last quarter of the 19th century and the beginning of the 20th century was characterized as a period of recessions in the US economy. So, after decades of lacking a central bank, and having encountered a series of financial panics, eminent bankers like J.P. Morgan and John D. Rockefeller Jr. to call for a restructuring of the American Banking system and this ultimately forced the government into acting on the Central Banking Plans.

At that time, during the Bank and economic panic period of 1907, Wall Street, turned to J.P. Morgan to steer the country through the crisis that was threatening to push the economy over the edge into a full crash and economic repression. J. P. Morgan was able to convene all the principal players at his mansion and command all their capital to flood the system, thus floating the banks that, in turn, helped to float the businesses until the panic passed.

Thus, the country’s dire financial need in the years between 1907 and 1913, prompted top bankers and government officials in the U.S. to form the National Monetary Commission and further traveled to Europe to see how the central banking was handled there. They came back with favorable impressions of the British and German systems, using them as the base and adding some improvements gleaned from other countries. Although initial proposals were repeatedly rejected by Congress. However, the fact that the government owed its economic survival to a private banker forced the necessary legislation to create a central bank and, the Federal Reserve Act was finally passed on December 22, 1913, establishing the Federal Reserve Bank.

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STRUCTURE OF THE FEDERAL RESERVE BANK

The Federal Reserve central bank is a multi-layered financial body, deriving its authority and spirit from the Federal Reserve Law of 1913. Despite being an executive agency, the financial body is largely independent of the control of the President or Congress and is described as being “independent within the government.” The Federal Reserve’s has four axes of power, which include the following:

  • Board of Governors
  • Federal Open Market Committee
  • Twelve regional Federal Reserve banks, and
  • Other member banks

 

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