A History of the United States Federal Reserve

Predecessors of the United States Federal Reserve

The First Bank of the United States was created in 1791 at the urging of Founding Father and Secretary of the Treasury Alexander Hamilton. This was the fledgling nation's first attempt to control banking in the United States, develop a national currency and have a central overseer of national economic policy.

From the beginning, however, the idea of a central bank had opponents. Many people, primarily in agrarian areas, thought that currency should not be nationally based and fought the idea of centralized national economic control. In 1811, the First Bank of the United States was not rechartered, and there was no central bank in the United States.

Congress decided to again create a central bank in 1816, chartering the Second Bank of the United States. It was recognized that without a central bank it was difficult to keep currency in check. However there were still many opponents. The charter of the Second Bank passed by a slim margin and when it came time for renewal in 1836 it failed to pass. This led to an almost thirty year period where there was no central national banking organization, known as the Free Banking Era.

In 1863, at the height of the Civil War the need for federal banking regulation was once again recognized. President Abraham Lincoln passed the National Banking Act, which created a system of national charters for banks within the United States and sought to develop a stable national currency.

Despite the reforms of the National Banking Act, the situation of banks and currency in the United States remained precarious. One of the chief concerns was bank panics, when people across the country would become worried about the state of the economy and seek to withdraw their accounts all at once, causing a run on currency and the defaulting of many banks who did not have the money at hand to pay back all of their clients.