: The 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 and credit.
   

: The Second Bank of the United States

• 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

• 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 state-chartered ones.
   
• National Bank Notes came into being by passage of the National Banking Act of 1863, later supplemented by the Act of June 3, 1864. By the terms of these acts, the government was enabled to grant charters to banks which were then allowed to issue their own notes, but only up to 90% of the par value of the U.S. Government bonds which the banks had previously deposited with the government as security for the notes about to be issued. Each bank had its own charter number, which appeared on all notes issued after 1875. The charter for any bank was valid for a period of twenty years. After that period, a bank could renew the charter for an additional twenty years and continue to keep issuing notes - hence the relationship between the series of 1882 and 1902.
  
   
• 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. A bank's charter began on the day when the Comptroller of Currency presented the bank with its "Certificate of Authority to Commence Business."
  
   
• 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.
   
• The issues of National Bank Notes took place during three periods which have been called the First, Second and Third Charter Periods. The Date on National Bank Notes. All National Bank Notes bear a full date (for example, November 7, 1912) on the face of the note, usually near the name of the city. This date is not necessarily the Charter date of the bank, but is generally somewhat later, and rarely, and surprisingly, even earlier; neither is it the date that the note was issued. The inconsistencies encountered and the many unknown contemporary factors involved in the production of these notes, have made it impossible to determine the exact significance of this date.
   
• The Dates of Issue. Insofar as National Bank Notes are concerned, the dates when they were actually issued are not always consistent with the dates in office of those Treasury Officials whose signatures appear on the notes. (These officials are the Treasurer of the U.S. and the Register of the Treasury). Whereas the original plates bearing their facsimile signatures were no doubt prepared during the period of their combined tenure in the Treasury Department, it was actually the practice of the Bureau of Engraving and Printing to use such plates whenever needed at a later date. As a result, these plates were quite frequently used to print notes long after the particular officials had passed out of office, and perhaps even after their death. That is why it is possible to see notes issued as late as 1922 bearing signatures that could have been originally engraved only in the 1890's.
   
• Until July 1875, National Bank Notes were wholly produced in New York City by the American, Continental or National Bank Note Companies. Their imprints appear on the notes. These three companies engraved and manufactured the plates and accomplished the main printing in their own premises on their own bank note paper. The Treasury Seal and Serial numbers, however, were printed later at the Treasury Department in Washington, D.C. After March, 1875, the same distinctive paper was required to be used as was then being used for other U.S. currency, and after September of that year, the obverses, or face sides of the notes, began to be printed at the Bureau of Engraving and Printing. The reverses, or backs however, continued to be printed privately in New York by the bank note companies, except for the black portion of the 5 Dollar Note which was let out for printing to the Columbian Bank Note Company in Washington, D.C. (The green portion continued to be printed in New York.)

The Creation of the Federal Reserve System

• 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 banks.
   

• 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 Dilemma of the New York Fed

• 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.
   

1914: New York Fed Opens for Business

• 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.
   

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Historical Documents from some of the National Banks