Today in Monetary History: February 25th, When Bad Stuff Happened

Former (First) Bank of the United States branch in Charleston, SC

Former (First) Bank of the United States branch in Charleston, SC. Image: Wally Gobetz

Because the US Congress used to adjourn its sessions on March 3rd, the week before that date would often see a flurry of bills being passed, slipping under the wire during the last days of session. Money and banking bills were no exception. February 25th marks the date that four important money and banking bills were passed. Unfortunately, as with many things done at the last minute, the effects of these bills were disastrous.

February 25, 1791 – Creation of the First Bank of the United States

An Act to incorporate the subscribers to the Bank of the United States.

February 25th marks the founding of the First Bank of the United States, the first attempt at creating a central bank in the United States. The creation of such a bank was hotly debated, as the Constitution grants the federal government no explicit authority to create such a bank. Nonetheless, Congress passed the bill, President Washington signed it into law, and the Bank of the United States was created. Its 20-year charter was allowed to expire in 1811, but the movement in favor of central banking didn’t die with it. The Second Bank of the United States was chartered in 1816, and even after its expiration in 1836 the proponents of central banking lived on, eventually triumphing with the creation of the Federal Reserve System in 1913. You can read more about the First Bank of the United States in Part II of the Ron Paul Monetary Policy Anthology.

February 25, 1862 – Legal Tender Act of 1862

An Act to authorize the Issue of United States Notes, and for the Redemption or Funding thereof, and for Funding the Floating Debt of the United States.

The Legal Tender Act was the first piece of legislation passed by the United States government authorizing the printing of paper money not backed by gold or silver. It was passed by Congress in order to provide funding for the Union in its war against the South. The legislation was to feature in the Legal Tender Cases, a series of Supreme Court decisions which first struck down the Act as unconstitutional, then later find it suddenly constitutional, notwithstanding the fact that the Constitution gives no authority to the federal government either to print paper money or to declare anything legal tender. Only the states are permitted to declare legal tender, and only gold and silver coin at that. This first experience with paper money was to have severe ramifications throughout the rest of the 19th century and into the early 20th century.

…such notes herein authorized shall be receivable in payment of all taxes, internal duties, excises, debts, and demands of every kind due to the United States, except duties on imports, and of all claims and demands against the United States of every kind whatsoever, expect for interest upon bonds and notes, which shall be apid in coin, and shall also be lawful money and a legal tender in payment of all debts, public and private, within the United States, except duties on imports and interest as aforesaid.

February 25, 1863 – National Banking Act of 1863

An Act to provide a national Currency, secured by a Pledge of United States Stocks, and to provide for the Circulation and Redemption thereof.

The National Banking Act of 1863 created the system of national banks which still exists today. While superseded by the National Banking Act of 1864, the Act of 1863 established the first national banks and the first national currency. It required banks created under the Act to deposit United States bonds in the amount of no less than one third of the banks capital with the Treasurer of the United States, in return for which the banks would receive paper money intended for circulation as currency. The entire scheme was intended as yet another way for the Union to fund the Civil War. Yet that initial scheme, with patchwork additions over the years, remains the basis for the banking system in the United States to this day. You can read more about the Legal Tender Act and the National Banking Acts in Part III of the Ron Paul Monetary Policy Anthology.

February 25, 1927 – The McFadden Act

An Act To further amend the national banking laws and the Federal Reserve Act, and for other purposes.

This bill allowed limited branch banking by national banks in the United States, which until then had been forbidden. National banks were allowed to branch within a state, if that state allowed branch banking, but not across state lines. It wouldn’t be until 1994 that interstate branch banking would be legalized.

More importantly, however, the McFadden Act eliminated the 20-year charter for the Federal Reserve Banks. The regional Federal Reserve Banks were granted initial 20-year charters in the Federal Reserve Act, similar to the 20-year charters of the First and Second Banks of the United States. The McFadden Act eliminated mention of the 20-year charter and replaced it with:

To have succession after the approval of this Act until dissolved by Act of Congress or until forfeiture of franchise for violation of law.

That granted the Federal Reserve Banks a charter more or less in perpetuity. Had that not been done, the charters would have been up for renewal in 1933, during the depth of the Great Depression. Would they have been renewed? Maybe, maybe not. And if they hadn’t been renewed, would the Federal Reserve System itself have collapsed? It might very well have. At the very least, it would look very different today than it does.

The initial 20-year charter has also spawned an urban legend that the Fed had a 100-year charter that would expire in 2013. That assertion first surfaced in a cheaply-published tract in the 1950s or 1960s which didn’t cite any sources, and has subsequently made the rounds on the Internet. There is no basis in fact for this 100-year charter, as it did not exist in the original Federal Reserve Act. Still, it would be nice to think that Congress would exercise its prerogative, revoke the charters of the Federal Reserve Banks, and abolish the Federal Reserve Board.