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After the war of 1812, to address the economic instability which resulted from the war, President James Madison supported the creation of a second national bank. An expanding money supply and lack of supervision of individual bank activity sparked high inflation. In 1816, a second national bank was created with a charter of twenty years. Three years later, during the panic of 1819 the second bank of the United States was blamed for overextending credit in a land boom. The bank tightened up credit policies following the panic, but the bank was unpopular, especially with western and southern state-chartered banks, and the constitutionality of a national bank was questioned.
When President Andrew Jackson came into office, he wanted to end the central bank during his presidency. Jackson believed that the bank favored a small economic and political elite at the expense of the public majority. So the Second Bank became a private bank after its charter expired in 1836.
For nearly eighty years, the U.S. was without a central bank after the charter for the Second Bank was allowed to expire. After various financial panics, particularly a severe one in 1907, many were convinced that the country needed some sort of central bank and currency reform that would maintain a ready reserve of liquid assets and allow for currency and credit to expand and contract as the economy required.
A National Monetary Commission was created by the Aldrich–Vreeland Act in 1908. In a report of the Commission, submitted to Congress on January 9, 1912, recommendations were made for banking and currency reform. The proposed legislation was known as the Aldrich Plan, named after the chairman of the Commission, Republican Senator Nelson W. Aldrich of Rhode Island.
The Plan called for the establishment of a National Reserve Association with 15 regional district branches and 46 geographically dispersed directors with experience in banking. The Reserve Association could make emergency loans to member banks, print money, and act as the fiscal agent for the U.S. government.
The Aldrich Plan gave too little power to the government, and many rural and western states were strongly opposed to it because of fears that it would become a tool of bankers. In 1913 a subcommittee of the House Committee on Banking and Currency held hearings on the alleged Money Trust and its interlocking directorates.
In the election of 1912, the Democratic Party won control of the White House and both houses of Congress. The party's platform was strongly opposition to the Aldrich Plan. It called for a systematic revision of banking laws in order to protect the public from the "Money Trust." But the Democrats' plan was quite similar to the Aldrich Plan
When Wilson became president in 1913, he supported The Federal Reserve Act was a part of his banking and currency reform plan. This legislation combined ideas taken from various proposals, including the Aldrich bill. However, unlike the Aldrich plan, which gave most of the controlling interest to private bankers, the new plan created a public entity, the Federal Reserve Board. The new Federal Reserve note was an obligation of the U.S. Treasury. Unlike the Aldrich plan, membership by nationally chartered banks in the federal reserve system was mandatory, not optional.
Previously, opposition to the proposed reserve system came from Progressive Democrats. With Wilson's legislation. opposition came largely from business-friendly Republicans. After months of hearings, debates, votes and amendments, the proposed legislation was passed as the Federal Reserve Act. The House, on December 22, 1913, agreed to the bill by a vote of 298 yeas to 60 nays, with 76 not voting. The Senate, on December 23, 1913, agreed to it by a vote of 43 yeas to 25 nays with 27 not voting.
The passage of the Federal Reserve Act of 1913 brought great changes to the United States economic system. Creating the Federal Reserve gave the federal government control to regulate inflation, though it also came with the power to make the wrong decisions, as history would prove. The Federal Reserve Act also permitted national banks to make mortgage loans for farm land, which had not been permitted previously.
Throughout the history of the United States, there has been long-standing economic and political debate over the costs and benefits of central banking. Opposition has centered around the notion that a central bank would serve a handful of financiers at the expense of the little guy: small producers, businesses, farmers and consumers. Proponents argue that a strong banking system provides enough credit for a growing economy and avoids economic depressions. Many of these arguments persist to this day.