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Essay: The History of Attempted Central Banking in the United States

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  • Published: 1 February 2018*
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The Federal Reserve System was born on 23 December 1913.  President Woodrow Wilson signed the Federal Reserve Act into law on that date.  However, this wasn’t the first attempt to create such a large, centralized bank.  United States currency goes all the way back to 1775 at the beginning of the American Revolution.  The first money notes were called ‘Continentals” are were used to finance the revolution.  However, these notes were handed out in such high amounts it led to inflation which rapidly grew as the war progressed.  The colonists lost faith in the note because by the end of the revolution it was practically useless as a result of the inflation.  

The first attempt Congress made at trying to establish a Central Bank was between the years 1791 and 1811.  Alexander Hamilton, the Secretary of the Treasury at the time, convinced Congress to establish the First Bank of the United States which was to be located in Philadelphia 1791.  At the time, it became the largest corporation in the United States.  The First Bank was not successful.  It was controlled and dominated by big banking and money interests.  The First Bank was large and powerful, and American citizens were skeptical at the thought of having one.  After the bank’s 20-year charter expired in 1811 Congress failed to renew it by a single vote.  The first attempt at Central Banking in the United states failed.  

That didn’t stop the attempt to establish a Central Bank in the United States.  The political climate in the year 1816 was favorable of the idea of a Central Bank.  By a tight vote it passed through Congress to charter The Second Bank of the United States.  But this second attempt of a Central Bank fails.  When the 7th president of the United States, Andrew Jackson, is elected into office in the year 1828 he vowed to kill the Second Bank of the United States as he was an enemy to the concept of central banking.  Jackson was very outspoken against banker-controlled power and many Americans were on his side.  In 1836 the Second Bank’s charter expired and was not renewed by Congress.

Fast forward to 1907, there was a severe banking panic when Wall Street failed.  J.P. Morgan stepped in helped to avoid any serious disaster to the economy.  In 1907 many Americans wanted reform of the banking system in the country.  But American citizens were deeply divided by what the reform should look like.  What sort of change to the structure needed to happen.  Conservatives and Progressives couldn’t agree on what action to take.  But still, there was a growing concern among a vast majority of the American population that some sort of Central Banking system should have authority to protect the currency and the banking system in general.

In 1908 The Aldrich-Vreeland Act was passed and created the National Monetary Commission.  The bill was passed in response to the Panic of 1907.   The aim of the commission was to prevent something like what happened in 1907 from occurring again by searching for long term solutions.  Here we start to see the government slowly starting to get their hands more and more into the banking industry.  Attempting to keep things ‘fair’ and ‘safe’.  Senator Nelson Aldrich was really the driving force behind the operation.  Through his leadership the commission laid out a plan that was banker-controlled.  Progressives were outspoken and did not like the plan at all.  Instead of banker-control, they wanted a Central Bank under public control.  The Republican backed plan (Aldrich plan) was thrown out when Democrat Woodrow Wilson took the office of the Presidency in 1912.  Although the Aldrich plan was scrapped, America could expect an emergence of a decentralized central bank.  

Sure enough on 23 December 1913 The Federal System was signed into law by President Wilson.  A decentralized central bank that takes into account both the wishes of popular opinion and of private banks.  In the Aldrich-Vreeland Act of 1908, an emergency currency was created.  In 1914 when The Great War erupted, American banks ran smoothly as a result of the Aldrich-Vreeland Act’s emergency currency.  The bigger role the Federal Reserve served in WW1 was the bank had the capability to discount banker’s acceptances.  Post WW1, The Federal Reserve determined that gold was not a big factor in managing credit anymore.  This was a huge decision that had an impact on the American Dollar and economy.

On 29 October 1929 the stock market crashed leading to The Great Depression which lasted 10 years ending in 1939 with the outbreak of a second World War.  This was a very big time for the history of the Federal Reserve.  Almost 10,000 banks failed as a consequence of the depression.  The economy was in ruins and many people blamed the Federal Reserve because they did not take proper action or recognize a massive crash was coming.  The Federal Reserve was scrutinized for a lack of knowledge regarding economics and monetary policy the stopped them from taking a necessary course of action to prevent the stock market crash.  The American government had no idea how to revive the economy.  When President Franklin Delano Roosevelt was elected in 1932, the public’s expectation of him was to do something productive and fix this economic disaster.  Slowly but surely, he did and is still praised today for it.  The first major piece of legislation that passed through the legislature was the Glass-Steagall Act, formally called the Banking Act of 1933.  In the act, The Federal Deposit Insurance Corporation (FDIC) was established.  It made it so operations in the open market were under control by the Federal Reserve.  All American banks and relating companies were under scrutiny from the Federal Reserve in an attempt to regulate so an economic as great as the one in 1929 will never happen again.  President Roosevelt also made a huge decision that is still debated today as to whether it should have happened or not, All gold, silver, and other valuable metal certificates were recalled ending the gold and metallic standard in 1933.

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