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 on behalf of the national banks to guarantee standardization in appearance and quality. This reduced the possibility of counterfeiting, an understandable wartime concern.
Who knows? Perhaps this very bill was used to buy a ticket to the premeir of Gone With the Wind. 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. 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 90 percent, and later 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.
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It was the hope of Secretary of the Treasury Chase that national banks would replace state banks, and that this would create the uniform currency he desired and ease the financing of the Civil War. By there were 1, national banks, about of which had converted from state banking charters. The remainder were new banks. However, this still meant that state banknotes were dominating the currency because most of them were discounted. Banks also began offering demand deposits to enhance commerce.
During the Civil War, the National Banking Act of was passed, providing for nationally chartered banks, whose circulating notes had to be backed by U. An amendment to the act required taxation on state bank notes but not national bank notes, effectively creating a uniform currency for the nation.
Despite taxation on their notes, state banks continued to flourish due to the growing popularity of demand deposits, which had taken hold during the Free Banking Era. Although the National Banking Act of established some measure of currency stability for the growing nation, bank runs and financial panics continued to plague the economy.
In , a banking panic triggered the worst depression the United States had ever seen, and the economy stabilized only after the intervention of financial mogul J. In , a bout of speculation on Wall Street ended in failure, triggering a particularly severe banking panic. Morgan was again called upon to avert disaster. The Aldrich-Vreeland Act of , passed as an immediate response to the panic of , provided for emergency currency issue during crises.
Federal Reserve Board - Federal Reserve Act
Under the leadership of Senator Nelson Aldrich, the commission developed a banker-controlled plan. William Jennings Bryan and other progressives fiercely attacked the plan; they wanted a central bank under public, not banker, control. The election of Democrat Woodrow Wilson killed the Republican Aldrich plan, but the stage was set for the emergence of a decentralized central bank. Parker Willis, formerly a professor of economics at Washington and Lee University.
Throughout most of , Glass and Willis labored over a central bank proposal, and by December , they presented Wilson with what would become, with some modifications, the Federal Reserve Act. From December to December , the Glass-Willis proposal was hotly debated, molded and reshaped. By December 23, , when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise—a decentralized central bank that balanced the competing interests of private banks and populist sentiment. Before the new central bank could begin operations, the Reserve Bank Operating Committee, comprised of Treasury Secretary William McAdoo, Secretary of Agriculture David Houston, and Comptroller of the Currency John Skelton Williams, had the arduous task of building a working institution around the bare bones of the new law.
But, by November 16, , the 12 cities chosen as sites for regional Reserve Banks were open for business, just as hostilities in Europe erupted into World War I. When World War I broke out in mid, U.
Banking Act of 1933 (Glass-Steagall)
Through this mechanism, the United States aided the flow of trade goods to Europe, indirectly helping to finance the war until , when the United States officially declared war on Germany and financing our own war effort became paramount. Following World War I, Benjamin Strong, head of the New York Fed from to his death in , recognized that gold no longer served as the central factor in controlling credit. During the s, the Fed began using open market operations as a monetary policy tool. During his tenure, Strong also elevated the stature of the Fed by promoting relations with other central banks, especially the Bank of England.
During the s, Virginia Representative Carter Glass warned that stock market speculation would lead to dire consequences.
In October , his predictions seemed to be realized when the stock market crashed, and the nation fell into the worst depression in its history. Many people blamed the Fed for failing to stem speculative lending that led to the crash, and some also argued that inadequate understanding of monetary economics kept the Fed from pursuing policies that could have lessened the depth of the Depression.
In reaction to the Great Depression, Congress passed the Banking Act of , better known as the Glass-Steagall Act, calling for the separation of commercial and investment banking and requiring use of government securities as collateral for Federal Reserve notes. The Act also established the Federal Deposit Insurance Corporation FDIC , placed open market operations under the Fed and required bank holding companies to be examined by the Fed, a practice that was to have profound future implications, as holding companies became a prevalent structure for banks over time.
Also, as part of the massive reforms taking place, Roosevelt recalled all gold and silver certificates, effectively ending the gold and any other metallic standard. In the Bank Holding Company Act named the Fed as the regulator of bank holding companies owning more than one bank, and in the Humphrey-Hawkins Act required the Fed chairman to report to Congress twice annually on monetary policy goals and objectives.
It did so at the request of the Treasury to allow the federal government to engage in cheaper debt financing of the war.
To maintain the pegged rate, the Fed was forced to give up control of the size of its portfolio as well as the money stock. Conflict between the Treasury and the Fed came to the fore when the Treasury directed the central bank to maintain the peg after the start of the Korean War in President Harry Truman and Secretary of the Treasury John Snyder were both strong supporters of the low interest rate peg.