Brief History and Origin of the United States Central Bank – Federal Reserve System

The central bank of the United States, also known as the Federal Reserve System(or simply Fed), was first a thought in Alexander Hamilton’s mind as far back as the 18th century. It only became a reality on December 23rd, 1913.

It is an autonomous central body for the banking system in the United States. This means that the Fed does not seek approval from the legislature or executive before approving monetary policy decisions. The Central Bank of the United States is a model bank for many countries worldwide. However, there is a history that led to where this bank is today.

Banking System in Colonial Times

You cannot talk about the history of the United State’s Central Bank without talking about what banking looked like in colonial times.

In colonial America, people used European coins, commodity money, and barter as their primary tool for transactions. Then, the scarcity of coins started, and the barter system introduced in America was no longer working.

Each colony had to look for solutions to their trading problems. Colonies came up with minted coins and paper currency as their means of exchange. This was how banking in the US was birthed.

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Need For a Central Banking System

When banks were introduced during colonial times, the system was not like we have today. There were no deposits or loan arrangements. Each colony had its currency. Hence,  there was a need to centralize banks across different colonies. After America had won its war of independence and became an independent state in 1789, Alexander Hamilton, the Treasury secretary, developed a plan to unify America’s banks.

He called for a federal bank that would give America one currency and carry out financial matters for the US. He was opposed by the then secretary of State, Thomas Jefferson. After much argument, a charter was made for the First Bank of the United States in 1791. This charter lasted 20 years.

One would think that there would be another charter almost immediately. However, it was not until 1816 that another charter was made for the Second Bank of the United States. Before 1816, States in the US had fallen back to the rules played by previous colonies. Various currencies were minted, but some of them were of uncertain value. The Second Bank also lasted 20 years and ended in 1836.

Financial Panic and The Fed

There were a series of events that occurred in the US after the charter of the second bank ended. The first is the Free Banking Period. This period was characterized by banking notes of different types from different states.

In 1860, there were almost 8000 banks in the US, and each of these banks was issuing their currencies. During the Civil war (1861-1865), the US saw the need for a uniform currency. In 1863, the national banking act was established. It not only unified the currency of the US, but it also decided which banks can print and distribute banknotes.

However, the US did not see the need for another Central Bank until there was financial chaos in the land. After the civil war, many banks shut down because they didn’t have enough cash to meet customers’ demands.

People withdrew their money from various banks. The Panic of 1907 forced the United States government to understand how critical the need for a central banking system is. The Panic lasted for three weeks, but that was all that was needed to convince America to unify her banking system. Thus, the Federal Reserve was established in 1913 by the administration of President Woodrow Wilson.

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Since the Fed was established, It has not been revoked. However, several changes have been made over time to make it what it is today.

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