The history of the federal reserve

By: Ethan Hendrickson

1775-1791: U.S. Currency

To finance the American Revolution, the Continental Congress printed the new nation's first paper money. Known as "continentals," the fiat money notes were issued in such quantity they led to inflation, which, though mild at first, rapidly accelerated as the war progressed. Eventually, people lost faith in the notes, and the phrase "Not worth a continental" came to mean "utterly worthless."

1791-1811: First Attempt at Central Banking

At the urging of then Treasury Secretary Alexander Hamilton, Congress established the First Bank of the United States, headquartered in Philadelphia, in 1791. It was the largest corporation in the country and was dominated by big banking and money interests. Many agrarian minded Americans uncomfortable with the idea of a large and powerful bank opposed it. When the bank’s 20-year charter expired in 1811 Congress refused to renew it by one vote.

1816-1836: A Second Try Fails

By 1816, the political climate was once again inclined toward the idea of a central bank; by a narrow margin, Congress agreed to charter the Second Bank of the United States. But when Andrew Jackson, a central bank foe, was elected president in 1828, he vowed to kill it. His attack on its banker-controlled power touched a popular nerve with Americans, and when the Second Bank’s charter expired in 1836, it was not renewed.

1873-1907: Financial Panics Prevail

Although the National Banking Act of 1863 established some measure of currency stability for the growing nation, bank runs and financial panics continued to plague the economy. In 1893, a banking panic triggered the worst depression the United States had ever seen, and the economy stabilized only after the intervention of financial mogul J.P. Morgan. It was clear that the nation’s banking and financial system needed serious attention.

1912: Woodrow Wilson as Financial Reformer

Though not personally knowledgeable about banking and financial issues, Woodrow Wilson solicited expert advice from Virginia Representative Carter Glass, soon to become the chairman of the House Committee on Banking and Finance, and from the Committee’s expert advisor, H. Parker Willis, formerly a professor of economics at Washington and Lee University. Throughout most of 1912, Glass and Willis labored over a central bank proposal, and by December 1912, they presented Wilson with what would become, with some modifications, the Federal Reserve Act.


The Federal Reserve System supervises and regulates a wide range of financial institutions and activities. The Federal Reserve works in conjunction with other federal and state authorities to ensure that financial institutions safely manage their operations and provide fair and equitable services to consumers. Bank examiners also gather information on trends in the financial industry, which helps the Federal Reserve System meet its other responsibilities, including determining monetary policy.

How a Bank Earns Profit

Just like any other business, a bank earns money so that it can run its operations and provide services. First, customers deposit their money in a bank account. The bank provides safe storage and pays interest on customers’ deposits. The bank is required to keep a percentage of deposits in reserve as cash in its vault or in an account at a Federal Reserve Bank. The bank can lend the rest to qualified borrowers. Potential borrowers may wish to buy a house or a new car; however, they may not have enough money to pay the full price at one time. Instead of waiting to save the money to pay for a new house, which could take years, they take out a loan from a bank. Borrowers are charged interest on the loan – a bank’s primary source of income. Banks also make money from charging fees for other financial services, such as debit cards, automated teller machine (ATM) usage and overdrafts on checking accounts.

Safety and Soundness

Two major focuses of banking supervision and regulation are the safety and soundness of financial institutions and compliance with consumer protection laws. To measure the safety and soundness of a bank, an examiner performs an on-site examination review of the bank's performance based on its management and financial condition, and its compliance with regulations.

Consumer Protection

Remember that customers deposit money in a bank, and then the bank makes loans with these deposits to qualified borrowers. Whether a customer deposits money in a bank or applies for a loan, there is a lot of information to consider. Suppose you deposit money into a savings account at a local bank. What minimum balances are you required to keep? Are you charged a penalty if your account falls below the minimum amount? When you apply for a loan for a used car, do you know if the interest rate is allowed to vary, or is it fixed for the life of the loan? If it is allowed to vary and interest rates go up, the total amount of interest you owe will increase. Banks are required to provide customers clear and accurate information about services, such as savings accounts, loans and credit cards. For example, a bank’s brochure for a savings account should include information on any minimum balance required, monthly service fee and the average percentage yield. In addition, the Truth in Lending Act requires banks to disclose the finance charge and the annual percentage rate so that a consumer can compare the prices of credit from different sources. It also limits liability on lost or stolen credit cards. These laws ensure that consumers and banks make decisions based on the same information.

Other Bank Regulators

Several federal and state authorities regulate banks along with the Federal Reserve. The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS) and the banking departments of various states also regulate financial institutions. The OCC charters, regulates and supervises nationally chartered banks. The FDIC, the Federal Reserve and state banking authorities regulate state-chartered banks. Bank holding companies and financial services holding companies, which own or have controlling interest in one or more banks, are also regulated by the Federal Reserve. The OTS examines federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations.