The Federal Reserve was a marvel to me ever since I started studying economics in school. It was just unbelievable how an institution could pull a nation, let alone, perhaps the whole world out of one of the biggest financial setbacks of the twentieth century, the Great Depression.
However, in school teachers only care about completing the curriculum. They do not, unfortunately, have the time and effort to give students a bit of a background regarding such interesting topics.
Therefore, the following series are aimed at giving the reader a comprehensive understanding of the American example of a centralized banking institution. This does not necessarily mean that the Fed is the only case to follow, but it is simply the institution with which I am most familiar.
Anyhow, historically, the American banking industry was never organized by any overseeing controlling agency like it is today.
The banking industry in the early days of the colonies consisted of entrepreneurial institutions that were state-chartered but almost unsupervised. These organizations had some extreme financial rights, such as printing money. In 1775, North Carolina had 17 different forms of money, Tobacco, British coinage, and that produced by its local banks.
The states allowed the banks to issue money depending on the amount of gold and silver. To non-economists, this means that the supply of money is almost endless. However, not in the good sense! Yet, rather in the sense that the more any of these banks would issue one more piece of currency, the less valuable it would become. People can no longer depend on the purchasing power of money. A very dangerous concept, not just economically, but also in reality!
The first voice that called for some control over such freelance institutions, was Alexander Hamilton, the first secretary of treasury, in 1790.
Hamilton's suggestion was to start an institution that would:
1. Control the number of US commercial banks and their activities.
2. Establish the credit for the U.S. government.
3. Regulate the country’s money supply by resolving the issue of fiat currency issued by the Continental congress before and during the Revolutionary war.
4. Relief the government form the revolutionary war's debt and unify the different currencies issued by different states.
Although Hamilton managed to pass his idea through the congress, he did face opposition from many people. His main source of opposition came from Thomas Jefferson and James Madison. They disliked this institution’s independence from the government and suspected that the bank may favorite the rich class rather than be concerned with the conditions of the general public.
The First Bank of the United States did do its job according to what was required in its charter, but, advocates against the idea of a centralized bank later won the second round and the concept of a centralized bank ceased to exist momentarily.
Yet, what happened thereafter was a surge in the number of state-chartered banks. Also, the cases of fraud and bank note depreciation rose due to banks refusing to issue notes to its clients for their deposit of silver and gold.
A funny rumor is that Hamilton’s ghost haunted the building of the First Bank of the United States after his death in a pistol duel with President Aaron Burr in 1804. Having the building blessed by a Catholic priest still did not stop Hamilton from appearing sporadically until this very day.
To be continued...
However, in school teachers only care about completing the curriculum. They do not, unfortunately, have the time and effort to give students a bit of a background regarding such interesting topics.
Therefore, the following series are aimed at giving the reader a comprehensive understanding of the American example of a centralized banking institution. This does not necessarily mean that the Fed is the only case to follow, but it is simply the institution with which I am most familiar.
Anyhow, historically, the American banking industry was never organized by any overseeing controlling agency like it is today.
The banking industry in the early days of the colonies consisted of entrepreneurial institutions that were state-chartered but almost unsupervised. These organizations had some extreme financial rights, such as printing money. In 1775, North Carolina had 17 different forms of money, Tobacco, British coinage, and that produced by its local banks.
The states allowed the banks to issue money depending on the amount of gold and silver. To non-economists, this means that the supply of money is almost endless. However, not in the good sense! Yet, rather in the sense that the more any of these banks would issue one more piece of currency, the less valuable it would become. People can no longer depend on the purchasing power of money. A very dangerous concept, not just economically, but also in reality!
The first voice that called for some control over such freelance institutions, was Alexander Hamilton, the first secretary of treasury, in 1790.
Hamilton's suggestion was to start an institution that would:
1. Control the number of US commercial banks and their activities.
2. Establish the credit for the U.S. government.
3. Regulate the country’s money supply by resolving the issue of fiat currency issued by the Continental congress before and during the Revolutionary war.
4. Relief the government form the revolutionary war's debt and unify the different currencies issued by different states.
Although Hamilton managed to pass his idea through the congress, he did face opposition from many people. His main source of opposition came from Thomas Jefferson and James Madison. They disliked this institution’s independence from the government and suspected that the bank may favorite the rich class rather than be concerned with the conditions of the general public.
The First Bank of the United States did do its job according to what was required in its charter, but, advocates against the idea of a centralized bank later won the second round and the concept of a centralized bank ceased to exist momentarily.
Yet, what happened thereafter was a surge in the number of state-chartered banks. Also, the cases of fraud and bank note depreciation rose due to banks refusing to issue notes to its clients for their deposit of silver and gold.
A funny rumor is that Hamilton’s ghost haunted the building of the First Bank of the United States after his death in a pistol duel with President Aaron Burr in 1804. Having the building blessed by a Catholic priest still did not stop Hamilton from appearing sporadically until this very day.
To be continued...
Sources: http://www.wikipedia.org/
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