Federal Reserve and Financial Crisis Essay

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Banking System

The United States banking system has been around for quite a while. Indeed, the Bank of New York was founded in 1784, a scant eight years after the United States was created. The banking system has two major functions. First, they operate an overall payments system. Second, they facilitate and allow for financial intermediation. There was no formal financial system in the colonial states prior to the formation of the United States. The modern form of the banking system has only really been around since the early 1900's. The nascent form of the banks as they exist today was created by Alexander Hamilton. As of the inauguration of George Washington in 1789, only three banks existed in all of the colonies. Generally speaking, banks are typically financial institutions that are chartered and regulated mostly by the state in which the bank or banks operate. The banking system of the United States experienced some major growing pains in the mid-1800's as the Industrial Revolution entered full swing. The Civil War and Abraham Lincoln brought about the federal chartering of banks rather than relegating the process and framework to the banks. This greatly helped stabilize the banking system and currency valuations in the United States (Sylla, 2016).

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Federal Reserve System

Even with the improvements of the late 1800's, the biggest shift in the history of the banking system was the creation of the Federal Reserve. Created in the 1910's, there was the creation of a single central bank. Prior to the creation of the bank, there was no centralization to speak of other than the aforementioned federal chartering that occurred during the time of Lincoln. The revised system was to help prevent against financial crises from happening. Over the last one hundred years, the Fed has been mostly successful. However, there have been times of major strife. The two most specific examples are the Great Depression in the 1930's and the much more recent financial crisis that ran from 2007 to 2009. Even so, the nationalization of the banking system was necessary because the system of notes and other documents that existed before the Fed was quite a mess and the lack of a singular and unified currency led to a rampant amount of counterfeiting and other problems. The Fed technically being a private institution is a problem for many people. At the same time, allowing politics and power-hungry politicians….....

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