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First Central Bank (1791-1811)

"The history of central banking in the United States does not begin with the current Federal Reserve System

The first central bank in the U.S. - The Bank of the United States - received its charter in 1791 from the U.S. Congress and was signed by President Washington. The bank charter was met with considerable controversy.

The [First] Bank of the United States had both public and private functions.

Its most important public function was to control the money supply by regulating the amount of banknotes state banks could issue, and by transferring reserves to different parts of the country. It was also the depository institution of the U.S. Treasury's funds. This was an important function because, as later experience would prove, without a central bank the Treasury's deposits were placed in private commercial banks on the basis of political favoritism.

The Bank of the United States was also a privately owned, profit-seeking institution. It competed with the state banks for deposits and customer loans. The Bank of the United States was both setting the rules and competing in the marketplace. This especially irritated state banks who joined and supported political interests in opposition to the Bank." ¹

"The First Bank of the United States has been considered a success by historians. The bank carried a remarkable amount of liquidity. In 18O9, its coin to banknote ratio was about 4O% (compared to modern average reserve to deposit ratio of about 6%). The chief argument in favor of the Bank's charter renewal in 1811 was that its circulation of about $5 million in commodity paper money banknotes accounted for about 2O% of the nation's money supply.


Those issued Banknotes were the closest thing to a national money that the U.S. had. Ironically, this fact may have contributed to the Bank's downfall because the Bank's issuance of Notes came at the expense of state banks. In addition, the banknotes issued by the Bank were not discounted, whereas state bank notes were discounted anywhere from O to 1OO percent.

State banks and their supported political interests were able to make convincing arguments, including foreign ownership and constitutional questions (the Supreme Court had yet to address the issue). A general suspicion of banking led to the failure of the Bank's charter to be renewed by Congress and thus the Bank died in 1811." ²

Second Central Bank (1816-1836)

"The Second Bank of the United States was chartered in 1816 with the same responsibilities and powers of the First Bank. However, the Second Bank would not enjoy the same successes as the first bank because it was plagued with poor management and outright fraud.


The Bank was supposed to maintain a 'money reserve' coin to note ratio stable at about 2O percent. Instead the ratio bounced around between 12% to 65%. It also undermined state banks by continuing the non-discounted note issuance practices of the First Bank which gave the Bank an unfair advantage in the marketplace.

State banks and their interests were so enraged that there were actually two different attempts to have the Bank struck down as unconstitutional. Both attempts failed.

In 1832, four years before the Bank's charter was to expire, political divisions over the Bank had already formed. Pro-Bank members of Congress produced a renewal bill for the Bank's charter, but President Andrew Jackson (the man on todays $2O bill) vetoed it.

No other bill to renew the Bank's charter was presented to President Jackson and so the Second Bank of the Unites States, along with its charter, died in 1836. The U.S. would go on without an official central bank until 1913 when the current central bank, the Federal Reserve System, was formed.³

Free Banking Era (1837-1862)

"Following the demise of the Second Bank of the United States in 1836, the American financial system entered what historians call the Free Banking Era. During this time, the only banks in the U.S. were those chartered by the states. The Federal Government neither chartered banks nor regulated the existing state banks.


The Constitution contains only two sections dealing with monetary issues. Section 8 permits Congress to coin money and to regulate its value. Section 1O denies states the right to coin or to print their own money. The Founding Fathers clearly intended a national monetary system based on coin and for the power to regulate that system to rest only with the Federal Government.

Although the Constitution does not state that the Federal Government has the power to print paper money, the Supreme Court in McCulloch vs Maryland (1819) ruled unanimously that the Second Bank of the United States and the banknotes it issued on behalf of the Federal Government were Constitutional.

If the Federal Government is only permitted to issue money, coin or paper, then how could state banks issue money?

State banks did not 'coin money' nor did they 'print' any official national currency. State banks simply issued bills of credit in exchange for coin deposits. These banknotes would bear the issuing bank's name and entitle the bearer to the Note's face value in gold or silver upon presentation to the bank. State banknotes were a form of representative money (commodity paper money); they were not gold or silver, but they represented it.




The banknotes were more convenient than the gold and silver coin money for conducting both large and small transactions. More importantly, banknotes were better collateral for the extension of credit (cheaper, faster, easier form of settlement between trade accounts).

The problem with this system was TRUST.


Banks had the ability to issue banknotes far in excess of their coin money deposits.


From time-to-time customers wanted to be able to exchange their banknotes for coin money, so banks kept a reserve of coin money on hand at all times. However, if the reserve ratio was too low even a small unexpected increase in the withdrawal rate could force the bank into insolvency. The remaining depositors at the bank would be left stuck with worthless banknotes not redeemable for any gold, silver, or bank assets. 

The public accounted for this 'non-redemption risk' by discounting the banknotes of banks that were considered risky. For example, a $2O Note issued by a bank with a reputation of redemption problems might carry a 5% discount off its face value. In other words, a local merchant might only give a customer $19 worth of goods for a $2O Note with the difference compensating the merchant for the risk of accepting the banknote. Discounts on Notes ranged from 95% for the riskiest banks to O% for banks with a high degree of public confidence.

At the advent of the Free Banking Era, there were 712 state banks in operation in the U.S., each with its own issued banknotes. Imagine the difficulty for both producers and consumers in tracking the riskiness and value of all these different banknotes.

"In this era it was deemed that the supply of gold and silver coins was insufficient to serve as the only form of money as is prescribed by a literal interpretation of the Constitution. FOR THIS REASON, DESPITE ITS INHERENT RISKS, STATE BANKING THRIVED AS A MEANS OF AUGMENTING THE MONEY SUPPLY WITH PAPER BANKNOTE CURRENCY.

In 1837 the Michigan Act was adopted as the first of the nation's free banking laws.


The Michigan Act granted a banking charter to any person or group that satisfied the established criteria which was that the bank's owners had to purchase at market value state bonds and then deposit those bonds with the state auditor as collateral.

FOR THE FIRST TIME IN THE U.S., BANKS COULD ISSUE BANKNOTES UP TO THE MAKRET VALUE OF THE BONDS. The performance of the bond market directly effected the banks ability to issue Notes. Banks were still required to redeem their Notes on demand in gold or silver coin. Depositors were granted a lien on the bank's assets, but there were no significant restrictions on a banks activities during this era.

How did the free banking system perform in terms of depositor safety and promoting economic stability?

Based on data from 7O9 banks from the Free Banking Era:

  • 5O% of banks failed

  • 33% of banks were unable to fully redeem Notes for Coin

  • 16% of banks existed for LESS THAN 1 year

  • AVG bank lifespan was just 5 years

Nearly all free banking failures were due to sharp declines in the market value of the state issued bonds that banks held. When the market value of bonds declined, the bank was required by law to withdraw some of its currency from circulation. This was accomplished by recalling loans. This shrank the money supply and put a tight credit vice on businesses.

In terms of economic stability, the Free Banking Era was characterized by considerable swings in the money supply and price levels. The Free Banking Era ended in 1863 with the passage of the first of the National Banking Acts. These laws reasserted Federal Government influence in the functioning of the nation's financial system." 

Michigan Act

Civil War & National Banking Acts

"Despite the private and state-sponsored efforts at reform during the Free Banking Era, the state banks still exhibited the many undesirable properties we've addressed above.

The National Banking Acts of 1863 & 1864 were attempts to assert some degree of Federal Government control over the banking system without the formation of another central bank. 

The Act had three primary purposes:

  1. Create a system of National Banks

  2. Create a uniform National Currency

  3. Create an active secondary market for Treasury securities to help finance Civil War (for the Union's side)

The first provision of the Acts was to allow for the incorporation of national banks. These banks were essentially the same as state banks, except national banks received their charter from the federal government and not a state government. This arrangement gave the federal government regulatory jurisdiction over the national banks it created, whereas it asserted no control over state-chartered banks.

National banks had higher capital requirements and higher reserve requirements than their state bank counterparts. To improve liquidity and safety they were restricted from making real estate loans and could not lend to any single person an amount exceeding ten percent of the bank's capital.

The National Banking Acts also created under the Treasury Department the office of Comptroller of the Currency which occasionally inspected the books of the national banks to insure compliance with the above regulations, and held Treasury securities deposited there by national banks.


The second goal of the National Banking Acts was to create a uniform national currency.


Rather than have several hundred, or several thousand, forms of currency circulating in the states, conducting transactions could be greatly simplified if there were a uniform currency. To achieve this all national banks were required to accept at par the banknotes of other national banks. This insured that national banknotes would not suffer from the same discounting problem with which state banknotes were afflicted.


In addition, all national banknotes were printed by the Comptroller of the Currency, via the Bureau of Engraving, on behalf of the national banks to guarantee standardization in appearance and quality. This reduced the possibility of counterfeiting, an understandable wartime concern.

The third goal of the Acts was to help finance the Civil War.


The volume of notes which a national bank issued was based on the market value of the U.S. Treasury securities the bank held. A national bank was required to keep on deposit with the Comptroller of the Currency a sizeable volume of Treasury securities. In exchange the bank received banknotes worth 9O percent, and later 1OO percent, of the market value of the deposited bonds.


If the bank wished to extend additional loans to generate more profits, then the bank had to increase its holdings of Treasury bonds. This provision had its roots in The Michigan Act, and it was designed to create a more active secondary market for Treasury bonds and thus lower the cost of borrowing for the Federal Government.

To reduced the proliferation of state banking and the notes it generated, Congress imposed a ten percent tax on all outstanding state banknotes. By 187O there were 1,638 national banks and only 325 state banks. While the tax eventually eliminated the circulation of state banknotes, it did not entirely kill state banking because state banks began to use checking accounts as a substitute for banknotes.


Checking accounts became so popular that by 189O the Comptroller of the Currency estimated that only 1O% of the nation's currency supply was in the form of currency. Combined with lower capital and reserve requirements, as well as the ease with which states issued banking charters, state banks again became the dominant banking structure by the late 188O's."

"There were two major defects remaining in the banking system in the post-Civil War era despite the control attempts of the National Banking Acts.

  1. The first was the inelastic currency problem.


The amount of currency which a national bank could have circulating was based on the market value of the Treasury securities it had deposited with the Comptroller of the Currency, not the par value of the bonds. If prices in the Treasury bond market declined substantially, then the national banks had to reduce the amount of currency they had in circulation.


This could be done by refusing new loans or, in a more draconian way, by calling in loans already outstanding. In either case, the effect on the currency supply is a restrictive one. Consequently, the size of the currency supply was tied more closely to the performance of the bond market rather than needs of the economy.

​   2. The second was the closely related liquidity problem.​

Small rural banks often kept deposits at larger urban banks. The liquidity needs of the rural banks were driven by the liquidity demands of its primary customer, the farmers. In the planting season the was a high demand for currency by farmers so they could make their purchases of farming implements, whereas in harvest season there was an increase in cash deposits as farmers sold their crops.


Consequently, the rural banks would take deposits from the urban banks in the spring to meet farmers' withdrawal demands and deposit the additional liquidity in the autumn. Larger urban banks could anticipate this seasonal demand and prepare for it most of the time. However, in 1873, 1884, 1893, and 19O7 this reserve pyramid precipitated a financial crisis.

When national banks experienced a drain on their reserves as rural banks made deposit withdrawals, reserves had to be replaced in accordance with the federal law. A national bank could do this by selling bonds and stocks, by borrowing from a clearinghouse, or by calling-in a few loans. As long as only a few national banks at a time tried to do this, liquidity was easily supplied to the needy banks.

However, a mass attempt to sell bonds or stocks caused a market crash, which in turn forced national banks to call-in loans to comply with the currency- Treasury bond regulation, and only a small portion of banks met the requirements to be members of the private clearinghouses. Many businesses, farmers, or households who had these loans were unable to pay on demand and were forced into bankruptcy. The recessionary vortex became apparent.

The 19O7 Crisis - Wall Street Panic

"The Panic caused what was at that time the worst economic depression in the country's history. It appears to have begun with a market crash brought about by both a speculative bubble and the liquidity problem and reserve pyramiding just discussed.


Centered on New York City, the scale of the crisis reached a proportion so great that banks across the country nearly suspended all withdrawals (a kind of self-imposed bank holiday). Several long-standing New York banks fell. The unemployment rate reached 2O percent in the fall of 19O7. Millions lost their deposits as thousands of banks collapsed.

The crisis was terminated when J.P. Morgan, a man of unscrupulous business tactics and phenomenal wealth, personally made temporary loans to key New York banks and other financial institutions to help them weather the storm. He also made an appeal to the clergy of New York to employ their Sunday sermons to calm the public's fears.  Morgan's emergency injection of liquidity into the banking system undoubtedly prevented an already bad situation from getting still worse.

What would happen if there were no J.P. Morgan around during the next financial crisis? Just how bad could things really get?

There began to emerge both on Wall Street and in Washington a consensus for a institutionalized J.P. Morgan, that is, an institution that could provide emergency liquidity to the banking system to prevent such panics from starting. The final result of the Panic of 19O7 would be the Federal Reserve Act of 1913."


Third Central Bank (1913-Present)

In 191O, Senator Nelson Aldrich, Frank Vanderlip of National City (Citibank), Henry Davison of Morgan Bank, and Paul Warburg of the Kuhn, Loeb Investment House met secretly at Jekyll Island, a resort island off the coast of Georgia, to discuss and formulate banking reform, including plans for a form of central banking.


The meeting was held in secret because the participants knew that any plan they generated would be rejected automatically in the House of Representatives if it were associated with Wall Street (learn more in the book The Creature from Jekyll Island).

The Aldrich Plan called for a system of fifteen regional central banks, called National Reserve Associations, whose actions would be coordinated by a national board of commercial bankers. The Reserve Association would make emergency loans to member banks, would create money to provide an elastic currency that could be exchanged equally for demand deposits, and would act as a fiscal agent for the federal government. The Aldrich Plan was defeated in the House as expected, but its outline became a model for a bill that eventually was adopted.

What eventually emerged was the Federal Reserve Act, also known at the time as the Currency Bill, or the Owen-Glass Act. The bill called for a system of eight to twelve mostly autonomous regional Reserve Banks that would be owned by commercial banks.

The Federal Reserve System would then become a privately-owned banking system that was operated in the public interest. Bankers would run the twelve banks, but those banks would be supervised by the Federal Reserve Board whose members included the Secretary of the Treasury, the Comptroller of the Currency, and other officials appointed by the President to represent public interests.

The House of Representatives passed the Federal Reserve Act by a vote of 298 to 60. The Senate also passed the measure 43 to 25. In both chambers of Congress, it was the anti-banker Democrats that overwhelmingly supported the Act, while for the most part the pro-banker Republicans opposed it.

President Wilson signed the bill on December 23, 1913 and the Federal Reserve System was born.

The Federal Reserve system as it exists today is not quite the same creature that was produced in 1913. The system has undergone rare, but susbstantial overhauls over the years. The two most important changes occurred in response to the Great Depression and to the mini-crisis of the late 197O's."

Depression & Gold Confiscation

One of the biggest devolutions of money was moving from Commodity Coined Money to Commodity Paper Money.

In fact, as seen in the picture of the Executive Order of the President, on April 5, 1933 the US government required all persons to deliver all Gold Coin, Gold Bullion, and Gold Certificates owned by them to a Federal Reserve Bank.

This was the US government forcing its own citizens to sell (confiscating) their gold to the Federal Reserve.

Can you believe this happened in the United States!?


Why would they do that?

They did it because they were going to use all the gold to back a new uniform issuance of gold-backed commodity paper money issued by the US Treasury.

gold confiscation.png

This new gold-backed money worked well for We the People and kept bank credit and systemic leverage in check.


The problems all started when US politicians made the change from MONEY to CURRENCY.

That historical and momentous shift away from money took place in 1971 under President Nixon. He removed the gold-backing the Dollar (ended convertibility) under the guise of protecting it from speculators.

All the bad and unsustainable economic trends we see today began at that exact time and can be visualized and confirmed in the charts supplied at

Let's take a look below at the alterations that took place in the US Dollar as it was changed from MONEY to CURRENCY.

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