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Central banking in the United States
The first institution with responsibilities of a central bank in the U.S. was the First Bank of the United States, chartered in 1791 by Alexander Hamilton. Its charter was not renewed in 1811.
In 1816, the Second Bank of the United States was chartered; its charter was not renewed in 1836, after it became the object of a major attack by president Andrew Jackson. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907 provided strong demand for the creation of a centralized banking system.
The Federal Reserve System (the Fed) has been the central bank of the United States since it was created in 1913. The main purpose of a central bank is to regulate the supply of money and credit to the economy. The board of governors, the Fed's principal policy-making organization, plays a key role in this process.
The board has seven members, two of whom serve as chairman and vice chairman. Each governor is appointed to a fourteen-year term, while appointments to the roles of chairman and vice chairman are for four years. The president, with confirmation by the Senate, appoints all seven governors and designates which ones should also be confirmed as chairman and vice chairman. The terms of Federal Reserve governors are long (second only to lifetime appointments of federal judges) to insulate the members from political pressures and foster independent decisions.
The responsibility for regulating the nation's money supply requires the Federal Reserve to influence the amount of reserve funds available to banks and thus the level and direction of short-term interest rates. For example, whether banks and other financial institutions will make loans depends on the profit margin—the difference in the rate of interest they must pay to attract deposits or borrow funds and the interest rate they can charge customers for credit. The greater the profit margin that banks can realize on new loans, the more they will want to lend. To influence interest rates on deposits and interest rates that banks pay to borrow funds, the Fed uses its congressionally granted authority to create money.
The Great Depression of the thirties shifted the Fed toward more central management of monetary affairs. Working with Marriner Eccles, a Utah banker, President Franklin Roosevelt fashioned the Banking Act of 1935, which concentrated the authority over monetary policy in Washington with the independent seven-member board of governors, and excluded the secretary of the Treasury and the comptroller of the currency. Eccles was appointed the first chairman of this new board, and a separate building was erected for its use on Constitution Avenue. Benjamin Strong's informal open-market group became a restructured, permanent Federal Open Market Committee in a provision of the banking act.
A trend of increasing board responsibility for the regulation and supervision of the banking system followed the shift in authority over monetary policy. Therefore, in addition to its primary function of managing U.S. monetary policy, today the board is also charged with the regulatory oversight of all bank holding companies, all state chartered banks that are members of the Federal Reserve System, and international activities of all U.S. banks. In addition, the board administers U.S. consumer banking laws and regulates margin requirements in the stock market.
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