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The history of centralized banking in America unfolded as a saga that involved controversial debates, crises, and legislative reforms aimed at establishing the Federal Reserve system and then changing its functions over time. These are a culmination of the discussions that took place during the colonial era and provided the basis for founding the first and second banks of the United States. A showdown with Nicholas Biddle against Andrew Jackson also contributed towards centralized banking. It is against this historical background that significant incidents such as the Panic of 1907 ushered into the formation of the Federal Reserve. The essay travels through the American landscape that led to different legislative milestones for the growing powers of the Federal Reserve, such as the Glass-Steagall Act and the Dodd-Frank Act, to illustrate how the modern U.S. economy has gradually developed.

Evolution of Centralized Banking: Colonial Period to Present Day:

There is a rich history of central banking in the U.S., beginning from colonial times. In the republic’s early days, a discussion emerged on the nature of central banking and what it meant for America. Hamilton argued that a central bank could stabilize the economy, while Jefferson feared it might confer too much power upon the Federalists. In 1791, the First Bank of the United States was created with a charter to expire in 10 years (Ugolini, 2017). The Second Bank of the United States was approved in 1816; however, its license was revoked in 1836. It was necessary before the fight between Nicholas Biddle and Andrew Jackson for the Second Bank of the United States. The Bank of the United States was shut down in 1836 by Jackson, who vetoed its chartering. The free banking era stretched from the demise of the second bank of the United States until the enactment of the Federal Reserve System. This was a period when different state-chartered banks were issuing their currencies, resulting in too much money or notes and no single denomination in the country as the national denomination.

The creation of the Federal Reserve System resulted from the financial crisis known as the Panic of 1907. Lack of liquidity brought about crises through bank runs and the shortage of currency. 1913, the Federal Reserve Act was enacted, which led to the Federal Reserve System (Ugolini, 2017). It comprised twelve regional banks and the board of governors in Washington, DC. He envisioned a central bank with local autonomy as an antidote for private banking power and populism.

Under the Glass Steagall Act of 1933, commercial and investment banking were separated and could not be combined. In 1978, Congress passed the Humphrey Hawkins Act that called for biannual reporting on Federal Reserve activities and monetarism (Eichengreen, 2018). The Glass-Steagall Act was nullified by adopting the Gramm-Leach-Bliley Act in 1999, permitting banks to offer commercial and investment banking services. The Dodd-Frank Act came about as a result of the Great Recession of 2008. It enhanced regulation in the finance sector and instituted the Consumer Finance Protection Bureau Act (Wells, 2017). Therefore, The development of central banking in the United States has been characterized by questions regarding the extent to which central banking should be involved in economic operations and how the country’s government should relate to its banking system. Over the years, its function has changed to fit into varying economies and the finance world, but it remains a crucial component for boosting America’s economy.

Key Events Leading to the Creation of the Federal Reserve:

The panic of 1907 marked a critical event in the trajectory of centralized banking. The government needs to strengthen the existing banks and ensure that the economy can be controlled when things go wrong. Subsequently, the passage of the Federal Reserve Act of 1913 created the Federal Reserve System, which became the government’s central banking authority. The objective of this legislative mark was to make the U.S. financial system more stable and flexible in response to the lessons learnt from the panic of 1907 (Phillips et al., 2016). Panic brought out the shortcomings, which resulted in the enactment of the Federal Reserve Act that made the U.S. a lender of last resort and mechanism for controlling the money supply. President Woodrow Wilson passed the Act, signalling a shift from decentralized banking toward centralized authority, which dominated during that time.

Expansion of Federal Reserve Responsibilities over Time:

Initially, the central bank focused on issues related to monetary stability, issuing currency, and functioning as a lender of last resort. Nevertheless, with change came a more significant role for the Federal Reserve. The Great Depression led to the formation of such acts as the Glass-Steagall Act of 1933, which separated commercial and investment banking activities (Phillips et al., 2016). The separation was intended to avert conflict of interest and promote the financial systems’ stability.

Another significant leap was made in the Federal Reserve’s mandate through the Humphrey Hawkins Act of 1978, which formally stipulated its dual mandate of pursuing maximum employment and price stability. This legislative change indicated that the Federal Reserve was integral to economic prosperity (Quinn & Roberds, 2023). His powers were augmented by the enactment of the Gramm-Leach-Bliley Act of 1999 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. First, it abolished legal constraints that enabled banks to undertake diverse financial functions. The second came from the 2008 financial crisis when wide-scale reforms were adopted to boost financial stability and guard against consumer vulnerability.

Analysis of Key Legislation Paving the Way for Greater Federal Reserve Power:

The pivotal place of the Glass–Steagall Act, which disjointed banking activities, shaped his area. 1999 saw its repeal during financial deregulation when the Gramm-Leach-Bliley Act enabled them to venture into different business activities. This development made the economy more complicated, with new challenges and risks. Notably, this legislation firmly established the Federal Reserve’s dual mandate and demonstrated that its role is vital for a healthy economy (Quinn & Roberds, 2023). Responding to the 2008 financial crisis, The Dodd-Frank Act significantly increased the Federal Reserve’s regulatory power. It was meant to tackle the primary sources of the situation and introduce stronger supervision provisions concerning large banks and a higher degree of openness in the derivatives trade.


The historical analysis of the emergence of centralized banking from colonial times to the current date is entwined with political disagreement, economic upheavals and legal highlights. Other events set the platform for the creation of the Federal Reserve Bank, which includes the initial debates that took place between Thomas Jefferson and Alexander Hamilton, as well as the establishment of the First Bank of the U.S. and Second Bank of the U.S. Finally, there is the fierce confrontation The Panic of 1907 functioned like a spark, triggering the establishment of the Fed and transforming American Finance. Other legislation, such as the Glass-Steagall Act, increased the Fed’s economic role and consolidated its position. Therefore, looking back at this exploration, one realizes that the Federal Reserve’s journey mirrors the changing economic demands and adjustment in the face of difficulties. Comprehending this development history regarding the contribution and continuum effect of the Federal Reserve to the U.S. economic development path remains essential for appreciating the depth of the Fed’s function within the U.S. economic system.


Eichengreen, B. (2018). The Two Eras of Central Banking in the United States. Sveriges Riksbank and the History of Central Banking, 361-387.

Phillips, R. J., & Minsky, H. P. (2016). A History of Currency and Banking in the United States. In The Chicago Plan and New Deal Banking Reform (pp. 8––21). Routledge.

Quinn, S., & Roberds, W. (2023). How a Ledger Became a Central Bank: A Monetary History of the Bank of Amsterdam. Cambridge University Press.

Ugolini, S. (2017). The evolution of central banking: theory and history. London: Palgrave Macmillan.

Wells, D. R. (2017). The Federal Reserve System: A History. McFarland.

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