Andrew Jackson developed the first central banking system in the United States in 1791. The second central banking system was developed in 1816. For almost 80 years, the United States had no central banking institution, which led to a series of financial panics. In 1907, there was a banking crisis known as the Panic of 1907, in which the New York Stock Exchange fell about 50 percent. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. A group of New York bankers got together and pledged large sums of money to get out of the recession. In 1913, the Federal Reserve System was formed under the Federal Reserve Act. Along with the new Federal Reserve, the National Monetary Commission was organized to study banking and currency reform.
The main purpose of the Federal Reserve when it was created was to prevent bank runs, and to respond appropriately when they do happen. Elastic currency is one way the Federal Reserve came up with to avoid bank runs in which money is expanded or contracted, as economic conditions warrant. Next, is the check clearing system, under the check clearing system, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The Federal Reserve has the authority and financial resources to act as “lender of last resort” by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy. The purpose of keeping funds at a Federal Reserve Bank is to have a way in which private banks can lend funds to one another. Private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is the part of government that regulates the private banks. The Board of...