Today in the United States, we have security in the banking system. People trust that banks wont fail, and their savings will be gone with it. While some people today do not completely trust in the banking system, the situation pales in comparison to the reality that people faced in the late 19th and early 20th centuries. In this time bank failures, economic panics, and slow economic downturns were as common as the seasons. Over time, American society has come to have faith in a Central Bank, known as the Federal Reserve System. The Federal Reserve System has many responsibilities, including, but not limited to, promoting economic growth, setting monetary policy, regulating and overseeing financial institutions, and issuing currency. All of these responsibilities have been very important for maintaining a strong economy, but the history of Central Banking in the United States shows that in the past it was not always a welcome entity.
The First Central Banks
The First Bank of the United States was founded in 1791, headquartered in Philadelphia. Secretary of the Treasury Alexander Hamilton headed the movement to create this first bank. “Alexander Hamilton, the first Treasury secretary, believed a national bank would stabilize the new government’s shaky credit and support a stronger economy — and was an absolute necessity to exercise the new republic’s constitutional powers” (Irwin 2013). With Hamilton’s influence, Congress agreed upon a central banking system. Its functions as a bank were very simple. It accepted deposits, issued notes, made loans, and purchased securities. It was the biggest corporation in the country at the time, and while it provided financial stability, many people did not trust such a powerful institution in the hands of such few people. When the charter ran out in 1811, it was not renewed.
The United States incurred a large debt during the War of 1812, and realized how important a central bank could be when funding and recovering from a war. This led to the establishment of The Second Bank of the United States in 1816. This bank had the same functions as the First Bank, but it was larger with $35 million in capital as opposed to the First Bank’s $10 million. President Andrew Jackson had always argued against a central bank, as he saw it as a threat to democracy. Many others shared this sentiment and the bank saw its expiration in 1836 when its charter was not renewed.
The Era of Free Banking
After the Second Bank fell, a period known as the Era of Free Banking occurred. During this period there was no central regulating mechanism to provide security or liquidity in the banking system. State chartered and unchartered banks offered their own notes, varying in reliability. This era ended when the National Banking Act was passed in 1863, which allowed for nationally chartered banks. These banks issued notes backed by government securities. The goal here was to make secure uniform currency, and a tax was...