Chicago Fed History: Introduction
Today, the words, Federal Reserve System, are recognized all over the world. But it was not always this way. The Federal Reserve was created following several false starts in the centuries preceding it. In the early years of this country, there was a struggle between rural and business interests about monetary policy. People in the rural areas thought that the states should hold control. Business interests thought otherwise.
The Era of the First Bank of the United States
In 1789, Alexander Hamilton, Secretary of the U.S. Treasury, started to argue loudly for the creation of a central bank. Thomas Jefferson, Secretary of State, insisted that this violated the Constitution. By 1791, Hamilton's view had prevailed.
"Whereas it is conceived that the establishment of a bank for the United States...will be very conducive to the successful conducting of the national finances; will tend to give facility to the obtaining of loans, for the use of Government,...and will be productive of considerable advantage to trade and industry in general: Therefore, be it enacted, etc. That a Bank of the United States shall be established." 1 With those words, the First Bank of the United States was granted a charter for 20 years.
It was jointly owned by the U.S. government and private individuals with stock worth $10,000,000. Twenty-five directors managed its operations: five from the government and 20 from industry. Headquartered in Philadelphia, it had offices in most major U.S. cities and took bank deposits and offered loans.2 It also was the government's bank — collecting taxes, paying its bills and granting it loans. By the time its charter was up for renewal in 1811, the general feeling was that it had become too powerful. Its charter was not renewed.
A Second Look at National Banking
Not all agreed that the First Bank had been too powerful. Commerce had thrived during its existence. The drive for a national bank continued. The problems funding the War of 1812 helped those who wanted another national bank to gain support. By 1816, resistance to the idea of a national bank had dropped in Congress. Many former opponents, including Sen. Henry Clay, now supported the idea. The Second Bank of the United States was chartered.
In 1816, the Second Bank was organized. Its structure was similar to the First Bank, but it was much larger. The stock of the Second Bank was worth $35,000,000. Again, the rural interests and owners of small business became concerned over the economic power the bank and the power of the men who controlled it. The election of Andrew Jackson as president signalled even greater problems for the Bank. In his inaurgural speech of 1829, he said the recharter of the Bank should be looked at quickly, since its powers were "well questioned by a large portion of our fellow cizitens." 3 In 1832, Congress approved the renewal of its charter, but President Andrew Jackson agreed with those opposed to the bank and vetoed the recharter. Following the veto, support for the bank dwindled and the bank closed in 1841.
The National Banking Act Helps in a Time of War
Following a time of financial troubles, for the country, the National Banking Act of 1863 was passed and signed into law by Abraham Lincoln. This created banks that could have offices in all states in the country, but did not create a central bank. "One of the most serious defects in our banking system is the absence of any strong, quieting hand which can enforce united actions by the banks," said Thomas Conway and Ernest Patterson.4 Although this act tried to create financial stability throughout the country, financial turmoil and bank runs were typical of the decades following its passage. This set the stage for the creation of the Federal Reserve System.
1Richard H. Timberlake, Jr., 1978, The Origins of Central Banking in the United States, Cambridge, MA: Harvard University Press, p. 1.
2Roger T. Johnson, 1999, Historical Beginnings...The Federal Reserve, Federal Reserve Bank of Boston.
3Timberlake, op.cit., p. 33.
4Thomas Conway and Ernest M. Patterson, 1914, The Operation of the New Bank Act, Philadelphia: J. B. Lippincott Company, p. 16.