The Founding of the Fed
First Bank of the United States
- After Alexander Hamilton spearheaded a movement advocating
the creation of a central bank, the First Bank of the United
States was established in 1791.
- The First Bank of the United States had a capital stock
of $10 million, $2 million of which was subscribed by the
federal government, while the remainder was subscribed by
private individuals. Five of the 25 directors were appointed
by the U.S. government, while the 20 others were chosen
by the private investors in the Bank.
- The First Bank of the United States was headquartered
in Philadelphia, but had branches in other major cities.
The Bank performed the basic banking functions of accepting
deposits, issuing bank notes, making loans and purchasing
securities. It was a nationwide bank and was in fact the
largest corporation in the United States. As a result of
its influence, the Bank was of considerable use to both
American commerce and the federal government.
- However, the Bank's influence was frightening to many
people. The Bank's charter ran for twenty years, and when
it expired in 1811, a proposal to renew the charter failed
by the margin of a single vote in each house of Congress.
Chaos quickly ensued, brought on by the War of 1812 and
by the lack of a central regulating mechanism over banking
- The situation deteriorated to such an extent that in 1816,
a bill to charter a Second Bank of the United States was
introduced in Congress. This bill narrowly passed both houses
and was signed into law by President James Madison. Henry
Clay, Speaker of the House, cited the "force of circumstance
and the lights of experience" as reasons for this realization
of the importance of a central bank to the U.S. economy.
- The Second Bank of the United States was similar to the
first, except that it was much larger; its capital was not
$10 million, but $35 million. As with the First Bank of
the United States, the charter was to run for 20 years,
one-fifth of the stock was owned by the federal government
and one-fifth of the directors were appointed by the President.
- This bank was also similar to its predecessor in that
it wielded immense power. Many citizens, politicians and
businessmen perceived it as a menace to both themselves
and U.S. democracy. One notable opponent was President Andrew
Jackson, who, in 1829, when the charter still had seven
years to run, made clear his opposition to the Bank and
to the renewal of its charter. Jackson's argument rested
on his belief that "such a concentration of power in the
hands of a few men irresponsible to the people" was dangerous.
This attack on the Bank's power drew public support, and
when the charter of the Second Bank of the United States
expired in 1836, it was not renewed.
- For the next quarter century, America's central banking
was carried on by a myriad of state-chartered banks with
no federal regulation. The difficulties brought about by
this lack of a central banking authority hurt the stability
of the American economy. There were often violent fluctuations
in the volume of bank notes issued by banks and in the amount
of demand deposits that the banks held. Bank notes, issued
by the individual banks, varied widely in reliability.
- Finally, inadequate bank capital, risky loans and insufficient
reserves against bank notes and demand deposits hampered
the banking system. To its detriment, the American public
had again opposed the idea of a central bank, and the country's
need for such an entity was more apparent than ever before.
- The National Banking Act of 1863 (along with its revisions
of 1864 and 1865) sought to add clarity and security to
the banking system by introducing and promoting currency
notes issued by nationally chartered banks, rather than
- The legislation created the Office of the Comptroller
of the Currency, which issued national banking charters
and examined the subsequent banks. These banks were now
subject to stringent capital requirements and were required
to collateralize currency notes with holdings of United
States government securities. Other provisions in the legislation
helped improved the banking system by providing more oversight
and a more robust currency in circulation.
- Ultimately, the national banking legislation of the 1860s
proved inadequate due to the absence of a central banking
structure. The inability of the banking system to expand
or contract currency in circulation or provide a mechanism
to move reserves throughout the system led to wild gyrations
in the economy from boom to bust cycles.
- As America's industrial economy grew and became more complex
toward the end of the 19th century, the weaknesses in the
banking system became critical. The boom and bust cycles
created by an inelastic currency and immobile reserves led
to frequent financial panics, which triggered economic depressions.
The most severe depression at that point in U.S. history
came in 1893 and left a legacy of economic uncertainty.
- In 1907, a severe financial panic jolted Wall Street and
forced several banks into failure. This panic, however,
did not trigger a broad financial collapse. Yet the simultaneous
occurrence of general prosperity with a crisis in the nation's
financial centers persuaded many Americans that their banking
structure was sadly out of date and in need of major reform.
- In 1908, the Congress created the National Monetary Commission.
This Commission, led by Nelson W. Aldrich and composed of
members of the House of Representatives and the Senate,
was charged with making a comprehensive study of the necessary
and desirable changes to the banking system of the United
States. The resulting plan called for a National Reserve
Association, which would be dominated by the banking industry.
This plan was treated with great skepticism and received
very little public support.
- In 1912, the House Banking and Currency Committee held
hearings to examine the control of the banking and financial
resources of the nation. The Committee concluded that America's
banking and financial system were in the hands of a "money
trust." The Committee's report defined a "money trust" as
"an established and well defined identity and community
of interest between a few leaders of finance . . .which
has resulted in a vast and growing concentration of control
of money and credit in the hands of a comparatively few
men." The public's awareness of a monopoly on the banking
system was crucial in leading to America's financial reform.
- Another key event leading to America's financial reform
was the election of Woodrow Wilson as President in 1912.
Wilson and his Secretary of State William Jennings Bryan,
forcefully opposed "any plan which concentrates control
in the hands of the banks."
- On December 26, 1912, the Glass-Willis proposal was submitted
to President-elect Wilson. Instead of suggesting the creation
of a central bank, the proposal called for the creation
of twenty or more privately controlled regional reserve
banks, which would hold a portion of member banks' reserves,
perform other central banking functions and issue currency
against commercial assets and gold. Wilson approved of this
idea, but also insisted upon the creation of a central board
to control and coordinate the work of the regional reserve
- The Federal Reserve Act presented by Congressman Carter
Glass and Senator Robert L. Owen incorporated modifications
by Woodrow Wilson and allowed for a regional Federal Reserve
System, operating under a supervisory board in Washington,
D.C. Congress approved the Act, and President Wilson signed
it into law on December 23, 1913. The Act, "Provided for
the establishment of Federal Reserve Banks, to furnish an
elastic currency, to afford means of rediscounting commercial
paper, to establish a more effective supervision of banking
in the United States, and for other purposes.
- The Act provided for a Reserve Bank Organization Committee
that would designate no less than eight but no more than
twelve cities to be Federal Reserve cities, and would then
divide the nation into districts, each district to contain
one Federal Reserve City.
- The controversies evident in the writing of the Federal
Reserve Act were carried over into the selection of the
Federal Reserve cities. New York was at the center of this
controversy. There was no doubt that New York would receive
a Federal Reserve Bank, but the size of the bank to be established
there was a highly contentious issue. The city's foremost
financiers, such as J.P Morgan, argued that the New York
Fed should be of commanding importance, so that it would
receive due recognition from the central banks of Europe.
The New York Fed that the financiers desired would have
approximately half of the capitalization of the entire system.
- However, many throughout the country feared that a Federal
Reserve Bank of such magnitude would dwarf everything else
in the system and would accord far too much power to the
New York District. Treasury Secretary William McAdoo and
Agriculture Secretary David F. Houston shared this opinion
and a belief that the European central banks should deal
with the Federal Reserve System as a whole, rather than
with just one of its parts.
- On April 2, 1914, the Reserve Bank Organization Committee
announced its decision, and twelve Federal Reserve banks
were established to cover various districts throughout the
country. Those opposed to the establishment of an overwhelmingly
powerful New York Fed prevailed in their desire that its
scope and influence should be limited. Initially, this bank's
influence was restricted to New York State. Nonetheless,
with over $20,000,000 in capital stock, the New York Bank
had nearly four times the capitalization of the smallest
banks in the system, such as Atlanta and Minneapolis. As
a result, it was impossible to prevent the New York Fed
from being the largest and most dominant bank in the system.
However, it was considerably smaller than the New York banking
community had wanted.
- The New York Fed opened for business under the leadership
of Benjamin Strong, previously president of the Bankers
Trust Company, on November 16, 1914. The initial staff consisted
of seven officers and 85 clerks, many on loan from local
banks. Mr. Strong recalled the starting days at the Bank
in a speech: "It may be said that…the Bank's equipment consisted
of little more than a copy of the Federal Reserve Act."
During its first day of operation, the Bank took in $100
million from 211 member banks; made two rediscounts; and
received its first shipment of Federal Reserve Notes.
- The Bank's staff grew rapidly during the early years,
necessitating the need for a new home. Land was bought on
a city block encompassing Liberty Street, Maiden Lane, William
Street and Nassau Street. A public competition was held
and the architectural firm of York & Sawyer submitted the
winning design reminiscent of the palaces in Florence, Italy.
The Bank's vaults, located 86 feet below street level, were
built on Manhattan's bedrock. In 1924, the Fed moved into
its new home. By 1927, the vault contained ten percent of
the world's entire store of monetary gold.
East Rutherford Operations Center (EROC)
- In 1992, the Bank opened an office in East Rutherford, New Jersey to accommodate currency and check processing operations and conduct electronic payments.
- In 1919, the Bank opened a branch in the city of Buffalo to serve institutions located in the ten (later increased to 14) westernmost counties of New York State. The Buffalo branch was closed in October 2008.
- In 1976, the Bank opened a regional office in Utica, New York. The Utica office provides commercial check processing and check adjustment services to financial institutions and Federal Reserve offices throughout the country. The Utica branch was closed in March 2008.
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