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History of federal reserve system essay
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After the Revolutionary War, many of the country’s citizens were in great debit and there was widespread economic disruption. The country was in need of an economic overhaul and the new country’s leaders would need to decide how to do this to ensure the new country did not fall apart. After two unsuccessful attempts at a national banking system, the Federal Reserve System was created by the Federal Reserve Act of 1913. Since its inception, the Federal Reserve System has evolved into a central banking system that grows with the country. The Federal Reserve System provides this country with a central bank that is able to pursue consistent monetary policies. My goal in this paper is to help the reader to understand why the Federal Reserve System was created, how it has evolved since it was created, and how it functions today.
To achieve this goal, I have organized my paper into three main sections, which have sub-sections. In the first section, I discuss why the Federal Reserve System was needed and the banks that preceded it. In the second section, I discuss the creation of the Federal Reserve System, key Acts that have affected it, and the evolution of its structure. I end my paper with a third section that explores the responsibility of the Federal Reserve System to be the monetary policy authority for the United States.
NEED FOR A NATIONAL BANK
After the War for Independence, the United States was in great need for financial structure. The war had caused economic disruption throughout the new country and the new country needed re-establish commerce, repay war debt, restore the value of the currency, and lower inflation. Alexander Hamilton, the first Secretary of the Treasury, decided to research the economic struc...
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...as over 75 years later before it made its last attempt, which is the system we have in place today. The Federal Reserve System has made many changes since it was first implemented but it remains the monetary policy authority it was created to be.
Works Cited
"The Structure of the Federal Reserve System." The Federal Reserve System Online. U.S. Federal Government, 08 Jul 2003. Web. 17 Sep 2011. .
Todd, Tim. The Balance of Power. First. Kansas City: Federal Reserve Bank, 2009. 1-2. Print.
United States. First Bank of the United States. Philadelphia: Federal Reserve Bank of Philadelphia, 2009. Web.
United States. History of Central Banking. Philadelphia: Federal Reserve Bank of Philadelphia, 2010. Web.
United States. Second Bank of the United States. Philadelphia: Federal Reserve Bank of Philadelphia, 2010. Web.
He states that the financial system was based on competing state banks with no central bank which promoted a rapid economic growth. As the American banking system developed the money supply developed with it. The federal government began the banking system through the issuing of specie but as the capitalist system developed the banking structure developed as well. During the Civil War, the North printed Greenbacks that drove gold from the domestic circulation to help pay for war necessities. The Greenbacks, however, were rarely used in the South expressing the different economies of the North and the South at the time of the Civil War. With differing economies and the growth of specie and paper money, Brands argues that the basis of knowledge about the money system of this time lays a foundation for how Carnegie, Rockefeller, and others were able to manipulate the market and gain wealth. Leading into price manipulation by those in corporate
In his First Report on Public Credit, Alexander Hamilton discusses the current financial situation of the United States and, as a response, proposes a plan to take care of the debt accrued from the Revolutionary War. Hamilton 's address tells the story of a significantly indebted newfound nation in desperate need of financial reorganization. He first discusses the strain that could be placed on public credit from public engagements and that the expensive engagement of war against Britain was the price to pay for liberty. Subsequently, he delivers his plan, which focused on the full payment of foreign loans, redemption of bonds (which would create new debt, but nonetheless establish good federal credit), and the assumption of individual state
-1. How could the Federal Reserve prevent and solve financial crisis? – The function of Federal Reserve.
As the new century approached, a national crisis began to develop in the United States. The nation faced a severe depression, nationwide labor unrest and violence, and the government’s inability to fix any of the occurring problems. The Panic of 1893 ravaged the nation and became the worse economic crisis of its time. The depression’s ruthlessness contributed to social unrest and weakened the monetary system’s strength, leading to a debate over what would be the foundation of the national currency. As the era ended, the US sought to increase its power and strength.
In the beginning of the 1830s, the United States experienced a short period of expansion and a prosperous economy. Land sales, new taxes, such as the Tariff of 1833, and the newly constructed railroads brought a lot of money into the government’s possession; never before in the history of the country had the government experienced a surplus in its national bank. By 1835, the government was able to accumulate enough money to pay off its national debt. Much of the country was happy with this newly accumulated wealth, but President Jackson, before leaving office in 1836, issued what is called a Specie Circular. Many local and state governments liked to save specie, or gold and silver, and use paper money to take care of transactions. President Jackson, in his Specie Circular, said that the Treasury was no longer allowed to accept paper money as payment for the sales of land and the like. Most, if not all, of the country did not like this, and as a result many banks restricted credit and discontinued the loans. The effects of Jackson’s Specie Circular took effect in 1837, when Martin van Buren became president. All investors became scared, and in 1837, attempted to withdraw all of their money at once. Soon after this, unemployment and riots occurred in many cities, and the continued expansion of the railroad ceased to be.
Since the birth of the country, there have been many influences on its development. The economy in particular has been an area of great importance. Many people have been factors in the growth of the United States’ economy. Perhaps the earliest and most influential of these was Alexander Hamilton. As shown in his effective policies, such as assumption of Revolutionary War debts, practical taxation, formation of the National Bank, and views on manufacturing, Hamilton was a dominant force from the beginning. During his term as secretary of the treasury, he acted with the power and commanding force of a Prime Minister. None of the other founding fathers contributed as much to the economy’s growth, and the shape of the country in general, as he did. Alexander Hamilton was the most influential of the United States’ early politicians on the development of the country’s economy.
Although the confederation gained some substantial powers, the crucial powers to tax and regulate commerce remained with the individual states. Each state passed their own currency, and therefore created inflation and made “Continentals” in circulation worthless. Compounded with restrictions on trade to Great Britain and down the Mississippi River, the states became mired in a heavy depression. John Fiske, of the conservative view, realized the precarious situation when he stated “the Nation was under the verge of collapse and near-anarchy and that the five year period after 1783 was the most critical time in American History.” Robert Morris, secretary of finance, resorted to desperate measures with the Newburgh conspiracy in an attempt to raise funds for a depleted military; but it took an impassioned plea from General Washington himself to put down the rebellion. Furthermore, the Articles allowed for personal rights abuses such as unsubstantiated foreclosures...
After the first War for Independence, The United States was approximately $52 million in debt. Due to having such bad financial problems, the United States created a national Bank to create one unified currency, to take away all state debts, and to issue loans to the people to promote growth. This National Bank was created by Alexander Hamilton who was a Federalist, and once Jefferson came to be the President, he continued the idea of the national bank because it was helping to reduce the national debt. The primary reason for the National Bank being a representation of a Federalist idea was because since it was issuing loans to people it was able to promote industrial growth which was one of the main goals of the Federalist party. From Jefferson continuing the use of the National Bank thru his presidency he demonstrates his need to continue a loose constructionist idea.
Franklin D. Roosevelt’s First Inaugural Address in 1933[ Richard Polenberg, The Era of Franklin D. Roosevelt 1933-1945: A Brief History with Documents (Boston: Bedford/St. Martin’s Press, 2000), 39-44.] was a famous speech because it instilled new hope in the people. During the speech, President Roosevelt said, “our greatest primary task is to put people to work/ there must be a strict supervision of a banking and credits and investments, so that there will be an end to speculation with other people’s money; and there must be provision for an adequate but sound currency.” Imaginably,a number of people could not find jobs and people were worried about putting money in a bank. Roosevelt emphasized the seriousness of reducing unemployment, reinforcing reliable baking system, and distributing currency. These problems were important contexts that shaped the content of this speech.
Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such control over our economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds. The Federal Reserve System is the central banking authority of the United States.
The Federal Reserve System is a board made up with seven members. These people make the big economic decision with American interest’s rates and is reasonable to print money for the government. For Americans it is imperative when the country falls into a recession. The American people need to be open to policy change and the government needs to help the people by following their own fiscal projections so the economy can move forward to help stabilize the economy and overall economic
2) Davis, Gareth. The Destruction of the Second Bank of the United States Rationale and
“[T]he man on the ten-dollar bill is the father of the American treasury system, a signer of the Constitution, one of the primary authors of the Federalist Papers, and the loser of the infamous duel with Vice President Aaron Burr. Alexander Hamilton's earlier career as a Continental Army officer is less well known. Yet Hamilton's first experience in public service is important, not only because it was the springboard to his later career, but because it also deeply influenced his values and thinking” (Hamilton).
Labonte, M. (January 7, 2014). Monetary Policy and the Federal Reserve; Current Policy and Conditions. Congressional Research Service.
Another problem prior to the establishment of the Federal Reserve System was the inelasticity of bank credit and the supply of money. Small banks placed their excess reserves in large central reserve banks. Whenever a bank’s depositors wanted their funds, the smaller banks would be covered by the central banks. The system worked well during normal conditions. Some banks would draw down on their reserves as other banks would be building up their reserves. In times of excessive demand, however, the problem became quite serious. When the public wanted large amounts of currency, the