Federal Reserve System
LECTURE NOTES
I. THE U.S. BANKING SYSTEM PRIOR TO THE FED
The early history of banking in the U.S. was characterized by frequent and serious difficulties. The First and Second Banks of the United States represented commendable efforts to strengthen banking activity but fell victim to political pressure. The National Banking Act of 1864 was another milestone in legislative attempts to strengthen banking practices. The nation finally came to grips with the need for a central banking system with the creation of the Federal Reserve System in 1913. Among the weaknesses of the banking and monetary system that the Fed was designed to correct was the arrangement for holding reserves and the inflexibility of banks' ability to expand or contract note issues in response to business conditions.
It was common practice for banks to place their reserve funds with other banks. This was especially true of small banks that depended on large city correspondent banks to hold their reserves. Yet,......
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