Welcome to OCDO! I was under the impression that the Federal Reserve was a central bank. Tell me more.
The federal reserve is a private bank under a permanent federal charter. It is not a branch of the federal government and acts independently of the federal Treasury department. The following are some selected sections of my personal research into the federal reserve, conducted in 2011. If anyone would like the entire paper, PM me....and wait patiently as I am a full time academic.
The First Bank of the United States, authorized by Congress and signed by George Washington, was Alexander Hamilton's brain child. When Washington's advisors, including Thomas Jefferson advised him that it exceed constitutional authority, Washington called on Hamilton to defend the creation. Hamilton responded with a 15,000 word treatise which convinced Washington and also brought us the "implied powers doctrine". That's what the Congress still uses to justify the level of federal expansion that they have claimed.....Obama Care being the latest of the "commerce clause/implied powers" fiascos perpetrated upon the American people.
The First Banks charter was for 20 years and was NOT renewed. Partially because Hamilton was no longer around to defend it, having died in his duel with Aaron Burr. Then came the War of 1812 which challenged American finances and the Second Bank of the United States was chartered. Again for 20 years and again, the charter was allowed to expire. There was also a political battle in which Nicholas Biddle, head of the Second Bank, took on Andrew Jackson who was running for President and was sure to refuse to renew the banks charter as he was completely opposed to it on constitutional issues.
“Both the constitutionality and the expediency of the law creating this bank are well questioned by a large portion of our fellow citizens, and must be admitted by all that it has failed in the great end of establishing a uniform and sound currency”. Andrew Jackson, President of the United States. (qtd from Todd, 2009, p. 5)
Jackson won, Biddle lost, and "The Monster of Chestnut Street" as the bank had come to be known lost its charter and ceased operations as a central bank in 1836. Interestingly, the Second Bank lost 1.5 million dollars (remember the date was the early 1800's when that was a LOT) and failed to stop the depression of 1819.....hmmmm about as successful as the current iteration?
The First and Second banks of the United States were true central banks, owned and chartered by the federal government. With the closing of the Second Bank, private banks began sending a "porter" around to the various banks to "settle" the various transactions of the day. The porter would arrive, checks (which began a rapid expansion in 1837) would be exchanged, and the difference either left with the bank or taken away by the porter in specie (gold or silver). "Private Clearing Houses" sprang up, the first in NY City, in the 1850's, in order to "settle" the growing number of transactions in a method more efficient and safe than the porter system. In 1893 and 1907 these clearinghouses actually issued their own money (by issuing small denomination bank checks) to alleviate shortages of "official" currency. These clearing houses were a creation of the free market and while not perfect, they were quite efficient and stabilized the economy to a large degree.
During the panic of 1907 financier J.P. Morgan organized associates and friends to stabilize the economy through lines of credit. Politicians, realizing that relying on the wealthy for the health of the nation’s economy was not a viable solution, passed the Aldrich-Vreeland Act in 1908. Part of the legislation created the National Monetary Commission chaired by Senator Nelson Aldrich. Aldrich. Through this commission Aldrich presented a plan in 1912 that had its roots in the famous 1910 Jekyll Island assembly of financiers and bankers.
The next attempt was the “Glass Bill” named for the politician who headed its development. The Glass bill retained some parts of the Aldrich plan but was very different. One major difference was to place the capital within the system in the regional banks rather than in a central or (main) bank in order to ensure representation of local interests over those of national bankers and politicians. President Wilson favored a central Board and the Glass bill was modified to create authority but not total control over the regional banks.
As in the past, the creation of the bank had major opposition. Senator Robert Owen of the House offered a substitute bill that reduced the number of regional banks and was felt to favor smaller banks. The House and Senate bills passed and their differences worked out in joint committee with President Wilson signing the Federal Reserve Act on December 23, 1913 and twelve regional Reserve Banks opening their doors on November 16, 1914 (Todd, 2009, p. 14).
In 1927 the McFadden Act removed the Federal Reserves twenty-year charter. The Fed had survived the point in its life where the First and Second Banks of the United States had failed, the Fed was now a permanent institution.
Yet another revision of the Fed occurred with the Banking Act of 1935. It gave the Federal Reserve Board received more power over the regional banks, required banks to join the FDIC, and modified the composition of the FOMC to include regional bank personnel. Perhaps most importantly, at least from the view of the Fed itself, was removal of the Secretary of the Treasury and Comptroller of the Currency from their Board positions (Todd, 2009, p 22).
In 1949 the greatest fight between the Fed and Dept of the Treasury began when the Chairman of the Fed announced that open market operations would be conducted with the primary goal of promoting business conditions. The result after much political posturing and bitter infighting was “The Accord”, a joint press release on March 4, 1951 in which the Treasury and Fed reached agreement, or rather compromise, with the Fed came out of the fight with the ability to conduct monetary policy without Treasury approval for the first time since 1934 (Todd, 2009, p. 30).
In today’s post market crash, post housing bubble crisis, even with political pressure on the Fed there is much less controversy between politicians and the Fed than at any time since 1935. However, the growing unpopularity of the government and the Fed with conservative constituents may well reopen the constitutionality argument against central banking in the United States and possibly threaten the existence of the nearly 100 year old institution of the Federal Reserve System.
Davies, P. (2007). The bank that Hamilton built [Electronic version]. Region, 21(3), 10-55. Retrieved January 16, 2011, from
http://search.ebscohost.com/login.aspx?direct=
true&db= aph&AN= 27200390&site=ehost-live
Davies, P. (2008). The "Monster" of Chestnut Street. Region (10453369), 22(3), 8-46. Retrieved February 1, 2011, from Academic Search Premier.
Gorton, G. (2008). Private clearinghouses and the origins of central banking. Business Review, (Jan/Feb), 3-12. Retrieved March 1, 2011, from
http://www.philadelphiafed.org/research-and-data/publications/business-review/
Todd, T. (2009). Balance of power (, pp. 998-999). Kansas City, MO. Federal reserve bank of Kansas City. Retrieved March 1, 2011, from Academic Search Premier.
