Bank of the United States,

central bank chartered in 1791 by the U.S. Congress at the urging of and over the objections of Thomas Jefferson. Extended debate over its constitutionality contributed significantly to the evolution of pro- and anti-bank factions into the first American political parties--respectively, the Federalists and the Democratic-Republicans. Antagonism over the bank issue grew so heated that its charter could not be renewed in 1811. Reconstituted in 1816, the Bank of the United States continued to stir controversy and partisanship, with Henry Clay and the Whigs ardently supporting it and and the Democrats ardently opposing it.

The first Bank of the United States was a cornerstone of Hamilton's fiscal policy; it was a means to fund the public debt left from the Revolution, to facilitate the issuance of a stable national currency, and to provide a convenient means of exchange for all the people of the United States. It was capitalized at $10,000,000 and fully subscribed almost instantly, with the federal government holding the largest block of ownership, 20 percent. A substantial interest in the bank was also purchased by Europeans.

The bank accomplished all Hamilton had hoped for and also succeeded in an unforeseen role: the regulation of private banks chartered by the several states. At this time the issuance of notes was a more conspicuous feature of banking than were deposits. Bank notes entered circulation as the money banks lent to their borrowers, and these notes comprised most of the total currency in circulation.

The rapid growth of the young country generated powerful demand for loans and tended to stimulate the overextension of credit. It was in the general interest to restrain such overexpansion, and the bank imposed that restraint automatically. As the depository of the government, with offices in the chief seaports and commercial centres, it constantly received from collectors of revenue the notes of private banks by which monies due the government were paid. As fast as it received such notes it called for their redemption in gold and silver by the banks of issue, thus automatically restricting the overextension of credit and protecting the economy from inflation. Conversely, in periods of panic and deflation, the bank could ease the pressure. It was engaged precisely in what came later to be called central banking.

Despite its successes, the bank met political opposition that gathered force with partisan changes taking place in the country. In good part, this opposition was based on the very restraints the bank imposed on private, state-chartered banks; this was also seen as an affront to states' rights, and the bank's federal charter was called unconstitutional. In 1811, when the 20-year charter expired, renewal was politically impossible. Its officers acknowledged reality and successfully sought a state charter in New York.

Within a few years, however, economic developments, chaotic conditions among the state banks, and changes in the composition of Congress combined to enable the chartering of a new Bank of the United States with wider powers than before and with closer links to the government. There was some early mismanagement, but in 1823 of Philadelphia became its president and the bank began to flourish.

Under Biddle, the central banking responsibilities were recognized and developed as consciously as those of the Bank of England at the same time--perhaps more so. But since these responsibilities usually had to be exercised as restraints, private banks resented them and complained of oppression.

The rapid development of American industry and transportation was enhancing the richness of the country's resources, and the idea of democracy was beginning to connote to entrepreneurs the idea of free enterprise and laissez-faire. Hence, the very conditions that made credit restraint advisable also made it objectionable. Meanwhile, a developing agrarian populism, especially in the South and West, and among the poor everywhere, was seeing in democracy opposition to privilege and aristocracy and wealth. The bank became known as "the monster," and the enemy of the common people. These incongruous strains against the bank united under the leadership of Andrew Jackson, who became president in 1829. His attacks on it were sustained and colourful and rallied wide support. Attacks on the bank's constitutionality continued, although a decade earlier the Supreme Court, in McCulloch v. Maryland, had found the charter constitutional under the doctrine of implied powers, leader of the Whigs in the Senate from 1831, championed the bank against the Jacksonian Democrats and in 1832 deliberately injected the bank question into the presidential campaign by bringing about the renewal, four years early, of the bank's charter, adopted by Congress on July 3. Jackson promptly vetoed the bank renewal act as unconstitutional, disdaining the Supreme Court decision and asserting that officeholders were bound by their oaths to uphold the constitution as they, not others, understood it. In a demagogic veto message he depicted the bank as the "prostration of our Government to the advancement of the few at the expense of the many."

The bank issue dominated the campaign of 1832, in which Jackson decisively defeated Clay. The veto stood, but the bank's charter still had four years to run, so Jackson determined to scuttle it ahead of time by withdrawing government funds from it. He shuffled his cabinet twice before finding in Roger B. Taney--who as attorney general had declared the move legal--a treasury secretary willing to withdraw U.S. deposits from the Bank of the United States and place them in various state-chartered private institutions, which quickly became known as "pet banks."

The Bank carried on as best it could until the expiry of its charter in 1836, when it sought and won a state charter as the Bank of the United States of Pennsylvania. The long and rancorous affair became known as the, and Jackson's victory in it precluded for almost 80 years--until the creation in 1913 of the Federal Reserve System--any effective regulation of private banks in the United States.

Federal Reserve System

central banking authority of the United States. It acts as a fiscal agent for the U.S. government, is custodian of the reserve accounts of commercial banks, makes loans to commercial banks, and is authorized to issue Federal Reserve notes that constitute the entire supply of paper currency of the country. Created by the of 1913, the system consists of the Board of Governors of the Federal Reserve System, the 12 Federal Reserve banks, the, the Federal Advisory Council, and, since 1976, a Consumer Advisory Council; there are several thousand member banks.

The Board of Governors of the Federal Reserve System determines the reserve requirements of the member banks within statutory limits, reviews and determines the discount rates established by the 12 Federal Reserve banks, and reviews the budgets of the reserve banks. A Federal Reserve bank is a privately owned corporation established pursuant to the Federal Reserve Act to serve the public interest; it is governed by a board of nine directors, six of whom are elected by the member banks and three of whom are appointed by the Board of Governors of the Federal Reserve System. The Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago, and San Francisco, and also in Cleveland, Ohio; Richmond, Va.; Atlanta, Ga.; St. Louis, Mo.; Minneapolis, Minn.; Kansas City, Mo.; and Dallas, Texas. The Federal Open Market Committee, consisting of the seven members of the Board of Governors and five members elected by the Federal Reserve banks, is responsible for the determination of Federal Reserve bank policy in the purchase and sale of securities on the open market. The Federal Advisory Council, whose role is purely advisory, consists of 12 members, one of whom is elected by the board of directors of each of the Federal Reserve districts. All national banks are required to be members of the Federal Reserve System, and state banks may become members if they meet membership qualifications.

The Federal Reserve System exercises its regulatory powers in several ways, the most important of which may be classified as instruments of direct or indirect control. One form of direct control can be exercised by adjusting the legal reserve ratio--i.e., the proportion of its deposits that a member bank must hold in its reserve account--thus increasing or reducing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the potential is, in this way, expanded or reduced. This policy tool has not been used very frequently in recent years.

The money supply may also be influenced through manipulation of the (also called rediscount) rate, which is the rate of interest charged by Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement.

The classic method of indirect control is through, first widely used in the 1920s and now employed daily to make small adjustments in the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial-bank reserves; e.g., when the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn.

The three instruments of control described here have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a period of depression. A supplemental control occasionally used by the Federal Reserve Board is that of changing the margin requirements involved in the purchase of securities.