History
Alexander Hamilton, the first Secretary of Treasury, started a movement advocating the creation of a central bank. The Bank Bill created by Alexander Hamilton was a proposal to institute a National Bank, in order to improve the economic stability of the nation after its independence from Britain. Although the national bank was to be used as a tool for the government, it was to be privately owned. Hamilton wrote several articles providing information regarding his national bank idea. The articles expressed the validity and "would be" success of the national bank based upon: incentives for the rich to invest, ownerships of bonds and shares, rooted in fiscal management, and stable monetary system.
In response to this, the First Bank of the United States was established in 1791, its charter signed by George Washington. The First Bank of the United States was headquartered in Philadelphia, but had branches in other major cities. The Bank performed the basic banking functions of accepting deposits, issuing bank notes, making loans and purchasing securities.
When its charter expired 20 years later, the US was without a central bank for a few years, during which it suffered an unusual inflation. In 1816, James Madison signed the Second Bank of the United States into existence. When that bank's charter expired, the United States went without a central bank for 40 years.
Then, in 1873, Congress nationalized money for the first time, imposing what was effectively a gold standard, in the place of the bimetallic standard set in place by the Founders. A financial crisis known as the Panic of 1907 was headed off by a private conglomerate, who set themselves up as "lenders of last resort" to banks in trouble. This effort succeeded in stopping the panic, and led to calls for a Federal agency to do the same thing.
In response to this, the Federal Reserve System was created by the Federal Reserve Act of December 23, 1913, establishing a new central bank intended to serve as a formal "lender of last resort" to banks in times of liquidity crisis—panics where depositors tried to withdraw their money faster than a bank could pay it out.
The legislation provided for a system that included a number of regional Federal Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. The Federal Reserve Banks opened for business in November 1914. Congress created Federal Reserve notes to provide the nation with a flexible supply of currency. The notes were to be issued to Federal Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.
Read more about this topic: Federal Reserve Bank
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