Question

Summarize the history (creation) of the Central Bank of the US and trace its impact on the US economy.

Answer 1

The U.S. central banking history does not start with the Federal Reserve. The US Bank obtained its charter from the U.S. in 1791. Congress and President Washington signed it. Treasury Secretary Alexander Hamilton crafted the charter of the bank, modeling it after the Bank of England, the central bank of Britain. The Bank had a great deal of controversy. Agrarian interests opposed the Bank on the grounds that they believed it would benefit commercial and industrial interests and encourage the use of paper currency at the expense of gold and silver.

The Bank's ownership was also a concern. By the time the charter of the bank was up for renewal in 1811, foreigners owned about 70 percent of its capital. While foreign shareholders had no voting power to influence the operations of the Bank, an 8.4 percent dividend was borne by outstanding shares. Another 20-year charter, it was claimed, would result in approximately $12 million being exported to foreign owners of the bank in already scarce gold and silver

State Secretary Thomas Jefferson argued that the Bank was illegal as it was an illegitimate federal power expansion. Congress, Jefferson argued, had only delegated powers stated in the constitution. Jefferson claimed that the only possible source of authority to charter the bank was in the necessary and proper clause, but he cautioned that if the provision could be so loosely interpreted in this situation, there would be no real limit to what Congress could do. Instead, oddly, he expressed his thoughts on this matter in the memorandum

The U.S. Bank had both public and private purposes. Its most important public role was to control the money supply by controlling the amount of bills issued by state banks and shifting reserves to different parts of the country. It was also the depository of the assets of the Treasury. This was an important function because the Treasury's deposits were held in private commercial banks on the basis of political favoritism, as later experience would show, without a central bank. The U.S. Bank was also an entity owned by the private sector, pursuing income. It was vying for deposits and loan customers with state banks.

Because the bank both set the rules and competed in the marketplace, especially frustrated state banks, and in opposition to the bank, they joined agrarian interests and Jeffersonians. The Bank was supervised by the Treasury Secretary, who was able to inspect all transactions and accounts of the Bank, except those of private individuals, and order on demand audits. The valuation of the Bank was set at $10 million in cash, divided into 25,000 voting stock shares, each with a par value of $400. Approximately 80 percent of the stock was sold by the federal government to the public with the remainder capitalized. No one could own more than 30 shares. Shares were also sold to foreigners, although the Bank's charter did not grant them voting rights