A Timeline of Central Banking
1791 – 1811
The First Bank of the United States
The brainchild of Alexander Hamilton was controversial from its inception. Public distrust led to the failure of a bid to renew its original 20-year charter.
1817 – 1841
The Second Bank of the United States
The Second Bank was also not widely understood by the public and strongly opposed by President Andrew Jackson. The Second Bank’s charter renewal became an issue during Jackson’s second presidential campaign, and he vetoed the bill in July 1832. The bank’s role dwindled, and it transformed into a commercial bank before eventually closing.
The Aldrich-Vreeland Act
After the Panic of 1907, the legislation provided for the issuance of emergency currency and created the National Monetary Commission to determine what changes might be needed to the monetary system and laws related to banking and currency.
The Federal Reserve Act
President Woodrow Wilson signed legislation creating the Federal Reserve on Dec. 23, 1913. Public concern about too much power being centralized on Wall Street or in Washington led to a decentralized and representative structure. The 12 regional Reserve Banks opened on November 16, 1914.
The McFadden Act
Although related primarily to bank regulation, the Act also erased the Federal Reserve’s original 20-year charter, giving the Fed permanence.
The Banking Act of 1933
Among other things, the Act created the FDIC and separated deposit and investment banks. For the Federal Reserve, the Act reined in the New York Federal Reserve Bank, which had made a concerted effort to position itself as the leader of the entire Federal Reserve System, especially in the area of international financial dealings. The Act also created the Federal Open Market Committee (FOMC).
The Banking Act of 1935
The Act centralized control over the Federal Reserve System at the Board of Governors in Washington, taking away some of the regional Reserve Banks’ autonomy. Among other things, the Act also removed the Treasury secretary and the comptroller of the currency from the Board of Governors, and created the modern structure for the FOMC.
Removing the Strait Jacket
Federal Reserve Chairman Thomas B. McCabe announced that the Federal Reserve would conduct monetary policy with a primary regard to business conditions, a step that McCabe later said marked “the removal of the strait jacket in which monetary policy had been operating.” Previously, Fed policies during World War II and the post-war years had been conducted in support of long-term debt prices to help the government finance spending.
The culmination of the battle that started with McCabe’s 1949 announcement, the Accord solidified the Federal Reserve’s independence from the Treasury, allowing the central bank to conduct monetary policy independently and without Treasury approval for the first time since 1934.
The Texas congressman had an ongoing political battle with the Federal Reserve. Patman believed the Federal Reserve functioned better when it was under Treasury control.
Various legislative efforts attempted to control and influence the Federal Reserve as the nation faced economic turmoil. Among the ideas finding varying degrees of congressional support were a proposal that would “request” a specific money supply growth target and an effort to give the president greater control over the Federal Reserve.
The Reagan and Bush Years
Amid soaring inflation and a climbing jobless rate, public and political attacks on the Federal Reserve escalated. The Treasury began criticizing Federal Reserve policy, and some lawmakers called for Fed Chairman Paul Volcker’s ouster and introduced legislation to give Congress more control over the Federal Reserve as it sought to rein in inflation. Under orders from Treasury Secretary Donald Regan, the administration started work on a major review of the Federal Reserve and its conduct of monetary policy. The efforts came to an end when the economy began to recover. The Federal Reserve faced numerous political battles including a lawsuit arguing that the Reserve Bank pres- idents should be presidential appointees and a lengthy fight with Texas Congressman Henry Gonzalez that was reminiscent of Wright Patman’s earlier efforts.
Crisis and Aftermath
Criticism has increased during the recent financial turmoil and its aftermath. The passage of Dodd-Frank resulted in congressionally mandated audits of the Fed’s emergency programs and governance structure in 2011. In 2012, Rep. Ron Paul held a hearing in which proposals to change the makeup of the FOMC and alter the Federal Reserve’s mandate were discussed.