The document discusses the history of the national bank and Federal Reserve system in the United States. It describes how the First and Second National Banks were established but also disbanded, leading to financial panics. This convinced lawmakers that a central banking authority was needed, resulting in the Federal Reserve Act of 1913 and the establishment of the Federal Reserve System to regulate the money supply and act as a lender of last resort.

1. The History of the National Bank
•Fear of centralized power and distrust of moneyed interests guided
central bank activities in the 19th century
•The National Bank was originally established in 1791 as part of a
deal between Hamilton and the Federalists and Madison and the
Republicans.
1.The First Bank of the U.S. was disbanded in 1811. Re-upped in
1816.
2.McCulloch v. Maryland, 1819 - John Marshall rules that Congress
can establish a National Bank to regulate commerce per the
‘necessary and proper’ clause in Article 1 Section 8

2. The History of the National Bank
•The Second Bank of the U.S. was disbanded in 1836 when President Andrew
Jackson vetoed its renewal; he favored ‘pet banks’ and specie over fiat (unbacked
paper)
•As a result, banking panics became regular events, absent a lender of last resort,
culminating in the panic of 1907.
•Widespread bank failures and depositor losses convinced the U.S. that a central
bank was needed.
•Fear of a “central authority” was rampant—people worried that powerful Wall
Street interests would manipulate the system.
1.Questions arose as to whether such a monetary authority would be private or a
government institution.
2.The Federal Reserve Act of 1913 was a compromise that created the Federal
Reserve System, including elaborate checks and balances.

3. The History of the National Bank
Each of the twelve districts has a main Federal Reserve Bank
and at least one branch office
The banks are “quasi-public”
Owned by member commercial banks in the district
Member banks elect six directors, while three directors are
appointed by the Board of Governors
Directors represent professional bankers, prominent
business leaders, and public interests (three from
each group)

4. The Structure of the Federal Reserve
1.Design was intended to diffuse power along the
following dimensions:
•Regions of the U.S.
•Government and private sector interests
•Needs of bankers, businesses, and the public
2.The system as it exists now includes:
•Twelve Federal Reserve Banks
•Board of Governors (BOG) of the Federal Reserve System
•Federal Open Market Committee (FOMC)
•Federal Advisory Council
•Member Banks (around 2,800)

6. Is the National Bank Constitutional?
Regulating the value of money might mean limiting the supply of money.
Consider the following:
•What gives “coin,” or money, value?
•Money used by the United States, and other modern economies, is called
fiat money because it is not backed by gold or other valuable commodities.
The value of fiat money comes from being endorsed by the government and
it has exchange value. In other words, people value dollars because others
will accept the dollars given to them in exchange for goods and services.
•The National Bank is tasked with regulating the money supply to make sure
inflation does not get out of hand.

7. Does the Federal Reserve work?
• Based on the evidence of 1929, were bank failures the primary
cause of the Great Depression?
• Given the more recent stock market crashes and recessions, the
Federal Reserve has proven itself as an effective means to prevent
future ‘great’ depressions.
• Prove or disprove this statement.

8. Is the National Bank Constitutional?
• In 1816, Congress enacted legislation to create the Second Bank of the
United States. The Bank was established in Philadelphia.
•In 1818, the Bank opened a branch in Baltimore, Maryland.
•The Maryland legislature attempted to restrict competition by imposing a tax
on any business not chartered by the state of Maryland.
•The Baltimore Branch refused to pay the tax and the state sued. The
Maryland courts upheld the tax. The state of Maryland argued that “the
Constitution is silent on the subject of banks.” That is, the argument was that
because the Constitution did not explicitly give the federal government the
authority to charter a bank, the power to do so was reserved for the states.
•As a result, the state of Maryland held that the Second Bank of the United
States was unconstitutional.

9. Is the National Bank Constitutional?
•The U.S. Supreme Court saw two questions: (1) Does Congress have the
power under the Constitution to incorporate a bank even though that
power is not explicitly granted in the Constitution? (2) Does the state of
Maryland (or any state) have the power to tax an institution created by
Congress as a result of congressional powers established by the
Constitution?
•John Marshall concluded that the Constitution was the act of the people of each
of the states. He reasoned that states had assembled delegates who specifically
represented the people of their state and thus acted on behalf of those people to
approve the Constitution and the federal government; thus, both state and
federal governments are derived from the people.
•The Constitution does not give Congress the expressed power to charter a bank;
however, the Constitution does grant Congress the powers to tax and to spend,
to borrow money, and “to coin Money [and] regulate the Value thereof” (Article
I, Section 8, Clause 5).

10. Is the National Bank Constitutional?
•The Constitution leaves it up to Congress to determine the appropriate
means by which those powers should be exercised (unless specifically
prohibited).
•The Constitution also grants Congress the power to adopt “all Laws which
shall be necessary and proper for carrying into Execution the foregoing
Powers and all other powers vested by this Constitution in the Government
of the United States or in any Department or Officer thereof” (Article I,
Section 8, Clause 18).
•Concerning the question of Maryland’s power to tax the Second Bank, the
Court held that the “power to tax is the power to destroy,” and therefore
taxing the Second Bank of the United States violated the Constitution as
the supreme law of the land as described in Article VI, Clause 2, which is
known as the supremacy clause.

11. National Bank and the Fed Reserve debate
• Should it move towards even more independence from
government?
• Should it move towards the European model of fully owned by the
public/government?