Banks chartered under these acts were much different than the two pre-Civil War national banks. Unlike the early banks, the new national banks were entirely privately owned and operated, restricted to a single office location, and subject to the supervision and regulation of the Office of the Comptroller of the Currency a division of the U.
Treasury established by the Banking Act of to issue charters to and supervise national banks. One important feature of the post-Civil War banking landscape was the almost total absence of branch banking. Banks chartered by state governments were never permitted to branch into other states, which put them at a disadvantage relative to the two pre-Civil War U. Antipathy toward the U. Consequently, the U. Unit banking contributed to instability by making it harder for banks to reach an efficient size or diversify their loan portfolios.
The inherently fragile unit banking structure coupled with an inelastic currency was a recipe for a crisis prone system. Finding a political solution was difficult, however, because it pitted the interests of large city banks against those of banks in smaller cities and rural areas. As the essay describes, a political solution was eventually found after the Panic of , when in December Congress passed and President Woodrow Wilson signed the Federal Reserve Act.
The Act established a system of Reserve Banks with capital provided by the member commercial banks in their designated territories. National banks were required to purchase capital in their local Reserve Bank and thereby become members of the System with access to loans and other services provided by the Reserve Bank.
Membership in the System was made optional for state-chartered banks. The essay also discusses how cities were chosen for the locations of Reserve Banks and how Federal Reserve district boundaries were drawn. The founding of the Fed had profound effects on the U. The Reserve Banks provided check clearing services for their member banks, for example, which reduced the time and cost for banks of obtaining funds for checks that were deposited in their banks.
An early innovation was the development of an electronic system for making long-distance payments using the telegraph which later became known as Fedwire. The Federal Reserve Act did not mention monetary policy. It also did not provide criteria for setting Reserve Bank discount rates. It did, however, require the Reserve Banks to maintain gold reserves equal to specific percentages of their outstanding note and deposit liabilities.
Implicitly, this requirement was intended to limit the amount of currency and loans the Fed could issue and thus serve as a brake on inflation. In the s, the Fed began to adjust its discount rate and buy and sell U.
Purchases of securities tended to lower rates and make credit more widely available while sales had the opposite effects. The Fed purchased securities in and when the economy slipped into recessions. By easing U. In , the Fed sold securities as policymakers sought tighter credit conditions to discourage stock market speculation. However, it all went terribly wrong in the s when the U. This was ineffective. People lacked faith in colonial currency and the right of a colony to issue money was often challenged by their British rulers.
Central banking in the United States began with the ratification of our Constitution in This was controversial. The new federal bank would also establish a national currency, replacing the notes issued by the colonies. In addition, the federal bank would carry out all financial matters for the U. He argued that the Constitution did not authorize the federal government to charter a national bank or issue paper currency.
Hamilton, supported by the Federalist Party, won the debate. The First Bank of the United States was chartered in Twenty years later, a bill to re-charter the bank failed. Without a centralized banking and credit structure, state banks took on the same role as the original colonies and began issuing their own paper currencies, often of questionable value.
This second bank lasted until , when President Andrew Jackson declared it unconstitutional and vetoed its re-charter. Over the next 25 years, U.
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After a fierce debate between the Fed and the Treasury for control over interest rates and U. This eliminated the obligation of the Fed to monetize the debt of the Treasury at a fixed rate and became essential to the independence of central banking and how monetary policy is pursued by the Federal Reserve today.
The s saw inflation skyrocket as producer and consumer prices rose, oil prices soared and the federal deficit more than doubled. The Monetary Control Act of required the Fed to price its financial services competitively against private sector providers and to establish reserve requirements for all eligible financial institutions. The act marks the beginning of a period of modern banking industry reforms. Following its passage, interstate banking proliferated, and banks began offering interest-paying accounts and instruments to attract customers from brokerage firms.
Barriers to insurance activities, however, proved more difficult to circumvent. Nonetheless, momentum for change was steady, and by the Gramm-Leach-Bliley Act was passed, in essence, overturning the Glass-Steagall Act of and allowing banks to offer a menu of financial services, including investment banking and insurance. Two months after Alan Greenspan took office as the Fed chairman, the stock market crashed on October 19, In response to the bursting of the s stock market bubble in the early years of the decade, the Fed lowered interest rates rapidly.
Throughout the s, the Fed used monetary policy on a number of occasions including the credit crunch of the early s and the Russian default on government securities to keep potential financial problems from adversely affecting the real economy. The effectiveness of the Federal Reserve as a central bank was put to the test on September 11, as the terrorist attacks on New York, Washington and Pennsylvania disrupted U. The discount window is available to meet liquidity needs.
By the end of September, Fed lending had returned to pre-September 11 levels and a potential liquidity crunch had been averted.
The Fed played the pivotal role in dampening the effects of the September 11 attacks on U. In , the Federal Reserve changed its discount window operations so as to have rates at the window set above the prevailing Fed Funds rate and provide rationing of loans to banks through interest rates.
During the early s, low mortgage rates and expanded access to credit made homeownership possible for more people, increasing the demand for housing and driving up house prices.
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