The Story of U.S. Central Banking

Alexander Hamilton, the first U.S. secretary of the Treasury, advocated for a national bank.

Image from Hamilton Buggy Co. via Wikimedia Commons

America’s central banking story begins with Alexander Hamilton, the nation’s first secretary of the Treasury. Hamilton pushed for a national bank to:

• Stabilize the country’s finances
• Manage government funds
• Create a single currency

Despite vocal political opponents such as Thomas Jefferson, Hamilton’s vision became reality in 1791 with the First Bank of the United States, which operated until its congressional charter expired in 1811. Political opponents also blocked the renewal of the charter, and the bank’s closing left the nation without a central bank just as the War of 1812 began.

Second Bank of the United States Faced Opposition

In the midst of economic stress following the war, the Second Bank of the United States was chartered in 1816 with an act signed by President James Madison. Madison had opposed the First Bank of the United States, but had come to believe that a central bank would be necessary to restore the country's financial position in a time of broad economic downturn.

The second bank, however, ran into similar political headwinds. After his reelection in 1832, President Andrew Jackson vetoed the renewal of its charter. Despite a Supreme Court ruling saying the bank was constitutional, Jackson argued in his veto message that the institution was “unauthorized by the Constitution, subversive to the rights of States, and dangerous to the liberties of the people.” Jackson saw his 1832 win as a strong validation of his antibank sentiment, and further dismantled the institution by withdrawing federal funds and distributing them to state-chartered banks. The Second National Bank of the United States closed its doors in 1836 when its charter expired.

Financial Panics Inspired Fed Creation

For the next 77 years, the United States went without a central bank, relying instead on a patchwork system of state-chartered banks. This era saw one financial panic after another, with the Panic of 1907 proving to be the final straw.

Congress took action on establishing a central bank after the financial Panic of 1907.

Image from New York Public Library via Wikimedia Commons

A congressional commission was established to look into ways to improve how the nation’s banking system responded to shocks. After years of debate, President Woodrow Wilson signed the Federal Reserve Act on Dec. 23, 1913, creating the Federal Reserve System.

Today, the Fed serves as the nation’s central bank. As the Board of Governors explains, the central bank:

• Conducts monetary policy
• Supervises and regulates banks
• Promotes financial system stability
• Fosters payment and settlement system services safety and efficiency
• Promotes consumer protection and community development

The Fed fulfills Hamilton’s original vision and keeps up with the demands of a modern economy.