After the Revolutionary War, many of the country’s citizens were in great debit and there was widespread economic disruption. The country was in need of an economic overhaul and the new country’s leaders would need to decide how to do this to ensure the new country did not fall apart. After two unsuccessful attempts at a national banking system, the Federal Reserve System was created by the Federal Reserve Act of 1913. Since its inception, the Federal Reserve System has evolved into a central banking system that grows with the country. The Federal Reserve System provides this country with a central bank that is able to pursue consistent monetary policies. My goal in this paper is to help the reader to understand why the Federal Reserve System was created, how it has evolved since it was created, and how it functions today.
To achieve this goal, I have organized my paper into three main sections, which have sub-sections. In the first section, I discuss why the Federal Reserve System was needed and the banks that preceded it. In the second section, I discuss the creation of the Federal Reserve System, key Acts that have affected it, and the evolution of its structure. I end my paper with a third section that explores the responsibility of the Federal Reserve System to be the monetary policy authority for the United States.
NEED FOR A NATIONAL BANK
After the War for Independence, the United States was in great need for financial structure. The war had caused economic disruption throughout the new country and the new country needed re-establish commerce, repay war debt, restore the value of the currency, and lower inflation. Alexander Hamilton, the first Secretary of the Treasury, decided to research the economic structure of other countries before recommending to Congress how the new country should proceed with this daunting task. Mr. Hamilton was especially interested in France and England. He came to realize that it was England’s economic structure that would provide him with a sturdy basis for creating an acceptable economic system. (Todd 1-2)
The First Bank of United States – 1791 to 1811. Mr. Hamilton urged Congress to adopt the model he had come up with, which included one national bank that would hold the federal government’s deposits and would lend to the government and business. Though there was much opposition, the proposal was accepted but the bank’s charter was given a 20 year limit. The bank, known as First Bank or Bank of United States, helped to bring the economy of the country together. However, it was a private institution where foreigners owned 70 percent of the bank and this concerned the citizens of the United States. When the charter was up for renewal it was rejected and the bank was closed in 1811. ("First Bank of the United States" 1-16)
During the twenty years it was in place the First Bank did change the economic downturn of the country after the war. The First Bank had branches in eight...