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Central Banking

From 1791 to the 21 st Century

The Federal Reserve System

Central Banking at a Glance
Congress establishes first Bank of the United States in 1791
• Nation’s first central bank
• Helps unify country’s economy

• Faces major opposition
• Has eight branches
• 20-year charter not renewed

Congress establishes second Bank of the United States in 1816, which serves the same functions as the First Bank
• Finances debt from War of 1812
• Bank President Nicholas Biddle and U.S. President
Andrew Jackson at odds over Second Bank

• 20-year charter not renewed
• Central banking not revived for more than 75 years

Federal Reserve System established
• Nation’s third central bank
• Banking Panic of 1907 raises issue of need for
central bank

• Congress passes Federal Reserve Act, December 23, 1913
• Like predecessors, Fed has 20-year charter, but
McFadden Act of 1927 gives Fed permanence

Nation faces grave economic woes; Great Depression leads to bank and business failures
• Congress passes laws to change financial system
- Glass-Steagall Act passed
- FDIC established
- SEC established

• New laws help to restore faith in safety of banks
and stocks

1940s - 1950s
Nation weathers WWII
• Congress passes Employment Act of 1946, which
defines goals of economic policy

• Treasury-Fed Accord reached in 1951; acknowledges
Fed’s independence in setting monetary policy

1960s - 1970s
Consumer protection laws take prominence beginning in late 1960s; high inflation and high unemployment plague nation in 1970s
• Congress passes Truth in Lending Act in 1968
• Community Reinvestment Act passed in 1977

• Humphrey-Hawkins Act of 1978 requires Fed to submit
report to Congress on monetary policy twice each year

1980s - 1990s
Deregulation of the banking industry takes hold
• Congress changes the way the Fed provides services • Glass-Steagall Act of 1933 reversed in 1999. Banks can
now combine with financial services firms in financial
• Consumers turn to electronic methods of payment,
holding companies
such as credit and debit cards

2000 & Beyond
New century means changes and challenges
• After the terrorist attacks on September 11,
2001, the Fed maintains financial stability by
pumping liquidity into the U.S. economy

• Enacted in 2003, Check 21 allows a paper check to be converted to an electronic
image, further changing the U.S. payment system
• The Fed takes extraordinary steps to respond to the financial crisis of 2008, lowering short-term interest rates to near zero and establishing special lending programs

The First bank of the United States
The history of central banking in the United States

in its lending policies influenced state banks’ lending

begins almost with the founding of the country.


Once America won its independence, Congress was
faced with the task of paying off the new nation’s

Like other banks, the First Bank made business loans,

war debts.

accepted deposits, and issued notes that circulated
as currency and were convertible into gold or silver.

Alexander Hamilton, the first

Unlike state banks’ notes, how-

Secretary of the Treasury, urged

ever, First Bank notes were valid

Congress to also assume the war
debts of the individual states
and then create a national bank
to help refinance all these debts.
Hamilton’s proposal faced major
opposition. Critics said that

The First Bank
helped transform
the country into
a more unified
national economy.

for payment of federal taxes.

The First Bank served as the
federal government’s fiscal agent,
receiving its revenues, holding its deposits, and making its

Hamilton’s bank was unconstitu-

payments. Its stock was publicly

tional, would be a monopoly, and

traded and held by both foreign

would reduce the power of the

and domestic investors.

states. Although Hamilton won, the bank’s charter
The First Bank helped transform the country into a

was limited to 20 years.

more unified national economy, but many AmeriThe first Bank of the United States, also called the

cans continued to oppose the bank. Some people still

First Bank, was not a central bank in the modern

thought that a national bank was unconstitutional;

sense, especially since the country had few banks.

others thought that it exerted too much power over

Nevertheless, with branches in eight port cities, its

the nation’s economy. When the bank’s charter came

large size and broad geographic presence gave it

up for renewal in 1811, it was rejected by a single

influence over the economy, particularly as changes

vote in each house in Congress.


The SECOND bank of the United States
After the War of 1812, the state banking system

The second Bank of the United States, like the First

was in turmoil. Congress tried to restore order and

Bank, was not a central bank in the modern sense.

finance debts from the war by establishing a second

It did not conduct monetary policy as we know

Bank of the United States. Like the First Bank, it

it today, and it did not supervise or regulate other

was given a 20-year charter.

banks. However, because the bank was very large —
it had 25 branches throughout the country by 1830

Despite a rocky start, the Second

— changes in its lending policies

Bank under Philadelphian Nicho-

influenced the lending practices of

las Biddle became quite effective

state banks.

in managing the nation’s finances.
But Biddle was a better banker
than politician. He underestimated
the opposition of state banks and
frontiersmen, who said that the
Second Bank helped only the

Despite a rocky
start, the Second
Bank was quite
effective in
managing the
nation’s finances.

The Second Bank’s primary functions were the same as the First
Bank’s. It was the federal government’s fiscal agent, receiving its
revenues, holding its deposits,
and making its payments. It made

East’s commercial classes.

business loans, accepted deposits,
and issued bank notes that circu-

Opponents of the bank found a

lated as currency and could be converted to gold

dent in 1829. Debate came to a head in the election

or silver. However, the number of state banks was

of 1832 when Jackson vetoed a bill for an early re-

growing rapidly,

charter of the bank that was supported by his

and competition

opponent, Henry Clay. Jackson won the election

between state

and transferred the federal government’s funds to

banks and the

state banks. After the Second Bank’s charter ran out

Second Bank

in 1836, central banking wasn’t revived for more

contributed to its

than 75 years.



Base map © Cartography Associates, David Rumsey Collection

powerful ally when Andrew Jackson became Presi-

The Third Central Bank:
The Federal Reserve System
The Federal Reserve System was not initially thought of

deposits from the general public. Instead it is a “bankers’

as a central bank. Indeed, much of the legislative debate

bank,” holding deposits and making loans to depository

in 1913 about establishing the Fed was about whether

financial institutions. Like the First and Second Banks,

the Federal Reserve would be one central bank or a

however, the Fed issues notes that circulate as currency.

collection of regional Reserve Banks. Initially, the Fed

Also, just as its predecessors had branches, the Fed has 12

operated as a system of Reserve Banks, with a substantial

Reserve Banks plus branches throughout the country.

amount of decentralized decisionmaking. In the 1920s, for instance,
some Reserve Banks sold Treasury
securities at times when other Reserve Banks were buying Treasury

To improve the coordination of
such open market purchases and
sales of securities, the Reserve Banks

The Fed is
the federal
fiscal agent,
receiving its
revenues, holding
its deposits,
and making its

Like the nation’s two previous
central banks, the Fed is the federal
government’s fiscal agent, receiving
its revenues, holding its deposits,
and making its payments. Originally, the third central bank also
had only a 20-year charter from
Congress. But the McFadden Act of
1927 gave it permanence. So, unlike

eventually formed the Open Market

its predecessors, the Fed has lasted

Committee in the 1920s. This was

beyond its initial charter period.

the predecessor of the FOMC (Federal Open Market

National banks and those state-chartered banks that

Committee), which was established by congressional

choose to be members of the Federal Reserve System

action in the Banking Act of 1933. The FOMC conducts

receive nontradable stock in their District Reserve Bank,

monetary policy as we know it today. In 1935, Congress

in contrast to the publicly owned and traded stock of

put all seven members of the Federal Reserve Board of

the First or Second Bank. By law, the stock earns a fixed

Governors on the FOMC and limited the Reserve Banks

6 percent dividend. Stockholders elect six of the nine

to only five voting members at any one time.

members of a Reserve Bank’s board of directors, while
the remaining three (including the chairman of each

Unlike the First and Second Banks, the Federal Re-

board) are appointed by the Federal Reserve’s Board of

serve was not designed to make business loans or accept



The great depression
The stock market crashed in 1929. Over the next

For example, Congress passed

several years, thousands of banks and businesses

the Glass-Steagall Act of 1933,

failed. By 1933, one in four Americans was out

which separated banking and

of work. After Franklin Roosevelt’s election in

securities firms. Congress

1932, the federal government moved quickly to

imposed further separation

implement his “New Deal.”

between banking and commerce by pro-

But the Federal Reserve’s role
during this time was neither
well defined nor well executed.
Despite numerous runs on
banks that led President Frank-

Many Americans lost their entire
savings when more than 6,500 banks
failed between 1929 and 1933.

hibiting banks

New laws
helped restore
faith in banks
and stocks.

from being owned by nonfinancial
companies. Furthermore, the Fed
was given authority to supervise
multibank holding companies and to

lin Roosevelt to declare a “bank

remove bank officers. The Fed also

holiday” in 1933, the Fed didn’t

received authority to restrict interest

adequately perform its func-

payments on bank deposits.

tion as the lender of last resort. Also, despite the
decade’s high unemploy-

Congress also passed the Banking Act of 1933, which

ment, the Fed did little to

established the Federal Deposit Insurance Corpora-

expand money or credit.

tion to insure consumers’ bank deposits. The Securities Exchange Act of 1934 created the Securities and

The market’s crash and

Exchange Commission (SEC). This law, together

the financial system’s pro-

with the Securities Act of 1933, was designed to

longed crisis led Congress

restore investor confidence in U.S. capital markets.

to pass several laws that

Congress also gave the Federal Reserve Board more

substantially changed the

central authority in the Banking Act of 1935, which

financial system and the

determined that the FOMC should include the

Federal Reserve.

seven-member Board of Governors as well as the
Reserve Bank presidents.

During the Depression many Americans
were unemployed and looking for jobs.

post-world war II &
the employment Act of 1946
After World War II, the Treasury wanted the

was issued — called the Treasury-Fed Accord

Federal Reserve to continue its wartime practice of

— that acknowledged the Fed’s independence in

helping the Treasury issue large amounts of federal

conducting monetary policy.

debt at low interest rates. The Fed went along for
several more years by buying Treasury securities —

Influenced by the Great Depression and changes

an action that expands money

in economic thinking about

and credit — whenever interest

government’s role, Congress

rates began to rise above very
low levels. But this meant that
monetary policy couldn’t raise
interest rates to combat inflationary pressures.

Influenced by
the Great
Congress passed
the Employment
Act of 1946.

passed the Employment Act of
1946, which defined the goals of
economic policy: to “promote
maximum employment, production, and purchasing power.”
These goals were meant to guide

At the start of the 1950s, tension

the fiscal policies of the Presi-

between the Fed and the Trea-

dent and Congress, as well as the

sury increased over this issue.

monetary policy of the Federal

Fed policymakers and some congressional leaders

Reserve. When the federal government debated

took the position that monetary policy must be

changes in fiscal policy during the 1950s, such as

independent of the Treasury’s financing plans. With

spending on the

war breaking out in Korea, President Truman’s

new interstate

Treasury wanted interest rates to remain low.

highway system
or new taxes,

The issue came to a head in early 1951, when the

these policy goals

Federal Reserve acted independently of the Trea-

were taken into

sury’s plan to issue debt. Ultimately, a statement



Revisiting Economic
Policy Goals
In the 1970s, a decade that experienced both

President to submit a report

high inflation and high unemployment, two

to Congress that explains the

legislators spearheaded a reconsideration of the

President’s economic goals and

nation’s economic policy goals. Senator Hubert H.

when they will be achieved.

Humphrey and Congressman Augustus Hawkins
It also required the Federal

believed the President’s administration and the
Federal Reserve should

Reserve to

coordinate their plans for

provide Congress

fiscal and monetary policies
to bring the unemployment
rate and inflation down to the
low levels reached in earlier

President Jimmy Carter signed
the Full Employment and
Balanced Growth Act into
law in 1978. Also known as

The HumphreyHawkins Act
required the
Fed to provide
Congress with a
report on the
Fed’s objectives
and plans for
monetary policy.

with a semiannual report
on the Fed’s
objectives and plans for monetary
policy. Twice each year, the Fed
Chairman’s “Humphrey-Hawkins
testimony” is closely watched for
signals of changes in monetary

the Humphrey-Hawkins Act,

Although Congress has since

this legislation required the

allowed many of the original
act’s provisions to lapse, the Fed
Chairman’s semi-annual testimony was retained.
It’s still popularly known as the HumphreyHawkins testimony.

Hubert H. Humphrey


Consumer Protection
For most of its history, the Fed’s involvement in the

In July 2010, Congress passed the Dodd-Frank Wall

protection of consumers largely involved ensuring

Street Reform and Consumer Protection Act. This

that banks were safe and sound. That changed in

legislation significantly changed the Fed’s role in

1968 when Congress passed the Truth in Lending

consumer protection. The Dodd-Frank Act created

Act (TILA) to inform consumers about the cost of

the Consumer Financial Protection Bureau (CFPB),

credit and to protect them against inaccurate and

which examines banks, savings and loan associa-

unfair credit billing and credit

tions, and credit unions with as-

card practices. As a result, the

sets greater than $10 billion to

Fed published Regulation Z,

ensure compliance with federal

which comprehensively specifies the protections for consumer
credit products, including residential mortgages, credit cards,
home equity lines of credit, and

The Fed
continues to
have a role in
enforcing the

consumer protection laws. The
CFPB also examines certain
nonbank providers of financial services, including payday
lenders, private education loan
providers, mortgage lenders and

private education loans.

brokers, and providers of foreclosure relief services. The power to

To ensure that lenders do not
discriminate against borrowers on the basis of race,

issue regulations for the various consumer protec-

color, religion, national origin, sex or marital status,

tion laws, which had been the responsibility of the

age, receipt of public assistance, or exercise of federal

Fed and other federal agencies, has been transferred

rights, Congress passed the Equal Credit Opportu-

to the CFPB. However, the Fed continues to have

nity Act (ECOA) in 1974. In 1977, Congress enacted

a role in consumer protection by examining cer-

the Community Reinvestment Act (CRA), which

tain state-chartered banks with assets less than $10

encourages banks to meet the credit needs of the

billion to ensure they are complying with federal

entire communities in which they are located and

consumer protection laws, and

requires the Fed and other banking regulators to

it continues to issue regulations
in the few instances in which

review banks’ lending patterns.

rulemaking power was not
transferred to the CFPB, such as
for the CRA.

Deregulation of the
Financial System
Since the 1970s, financial market innovations and


competition have spurred state legislatures, Con-

Depository Institutions Deregulation and Monetary

gress, and federal bank regulators to ease Depres-

Control Act (1980) phased out restrictions on banks’

sion-era restrictions on banks. Both banks and

ability to pay interest on deposits.

their holding companies were gradually allowed to


increase their range of financial products, pay market

Neal Interstate Banking and Branching Efficiency

interest rates on most deposits,

Act (1994) provided a framework

and expand across state lines.

that permitted interstate banking

This trend toward deregulation
culminated in 1999 when Congress reversed the Glass-Steagall
Act separating banks from securities firms and insurance compa-

In 1980,
Congress changed
the way the
Fed provides

and branching as of 1997 but allowed states some flexibility in its
The Financial Modernization Act
(1999), also called the Gramm-

nies. Now banks can combine

Leach-Bliley Act, repealed the

with these financial services firms

prohibition against combining
commercial banking, investment banking, and many

in “financial holding companies.”

insurance activities in the same organization.
Since the Federal Reserve is charged with impleIn the Depository Institutions Deregulation and

menting many of Congress’s banking laws, financial
deregulation has affected how

Monetary Control Act, Congress also changed the

the Fed oversees banks, bank

way the Fed provides services. Instead of the Fed’s

holding companies, and finan-

providing discount window loans, check clearing,

cial holding companies.

and other payment services only to its member banks,
Congress required the Fed to offer these services, at

Congress deregulated banking

a price, to all depository institutions. In turn, all de-

in three key ways:

pository institutions above a certain size are required
to hold money in reserve accounts with the Fed.


Central Banking
Enters the 21st Century
The most striking change in American central bank-

major reduction in the num-

ing over the past 200 years is the prominence to

ber of paper checks processed

which it has risen. Unlike its predecessors, the Fed

throughout the industry. As

is acknowledged to be the nation’s central bank. It

a result, the Federal Reserve

is insulated from partisan political pressure, but it is

started to shrink its check-

clearly accountable to Congress, which has defined

processing footprint from 45

the Fed’s monetary policy goals:

sites in 2003

to promote price stability and

to only two

maximum sustainable economic

sites in 2010.

growth and employment.

The Fed’s regional structure
ensures that the views of a broad
spectrum of people from across
the nation are brought to bear on
these important policy decisions.

In recent years, the Fed has also

The modern-day
Fed reflects the
lessons of
history and the
of a rapidly
economic and
financial system.

In 2010, the
Federal Reserve
moved all re-

As the Fed moves to processing checks
electronically, it will need fewer highspeed check sorters such as this one.

maining paper
check processing to the Federal
Reserve Bank of Cleveland and all
electronic check processing to the
Federal Reserve Bank of Atlanta.
In December 2012, the volume of

responded to the challenges pre-

paper check processing continued

sented by the many changes in the

to drop, and this function was also

financial services industry, which

transferred to the Atlanta Fed.

had led the Federal Reserve to undergo a considerable number of adjustments as well.

The modern-day Fed reflects not only the lessons of history but also the demands of a rapidly

For example, the Check Clearing for the 21st Cen-

changing economic and financial system. Thus,

tury Act, which was passed in 2003 and went into

central banking in the United States has evolved

effect in 2004, promoted the greater use of elec-

and adapted over the last two centuries and has

tronic processing of check images, rather than the

moved into the 21st century with a sense both

return of an actual check. This legislation led to a

of history and of the challenges that lie ahead.


Board of Governors

Federal Reserve Bank of Minneapolis

Federal Reserve Bank of Atlanta

Federal Reserve Bank of New York

Federal Reserve Bank of Boston

Federal Reserve Bank of Philadelphia

Federal Reserve Bank of Chicago

Federal Reserve Bank of Richmond

Federal Reserve Bank of Cleveland

Federal Reserve Bank of San Francisco

Federal Reserve Bank of Dallas

Federal Reserve Bank of St. Louis

Federal Reserve Bank of Kansas City

Published by the Federal Reserve Bank of Philadelphia
on behalf of the Federal Reserve System.

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