Central banks are some the oldest financial organizations in the world while Bitcoin has only been around for the last 11 years. Bitcoin might be replacing banks in a new golden age. To learn more on how central banks might become obsolete as Bitcoin and cryptocurrencies in general keep gaining popularity.
Central Banks and Their Long History
Despite the common belief that the U.S Federal Reserve is the first Central Bank funded in the U.S., the Bank of United States was the first officially established, being proposed by Alexander Hamilton in 1791. Its initial goal was to serve as a repository for federal funds and as the government’s fiscal agent at the time. However, many critics of the First Bank feared that its interference was constraining economic development.
Its charter was renewed in 1811 and in 1816 a Second Band was formed, bringing renewed controversy. The U.S. Supreme Court supported it but there was the lingering concern that this action represented an unconstitutional use of federal power. Critics, working with agrarian opponents of the bank, succeeded in preventing the renewal of the charter in 1811, and the First Bank went out of operation. A year later, however, due to financing problems caused by the War of 1812, the U.S Central Bank was re-established, and in 1816, the Second Bank of the United States was instituted with similar functions to the first one.
Andrew Jackson’s Interference with Banks
President Andrew Jackson removed all federal funds from the bank in 1832, and once its charter expired in 1836, he ceased its operations as a national institution. It continued as a commercial bank under the laws of Pennsylvania and continued operating until it eventually collapses in 1841.
Simultaneously to this time period, from 1834 to 1933, the price of gold was fixed at $20,67 per ounce in the United States, however, it took until 1879 for the U.S. to adopt the gold standard for its currency. Once banks were closed, financial turmoil resulted between 1836 and the founding of the Federal Reserve System established in 1913. It took until 1910 until a group of bankers met on Jekyll Island to create a resurgence of the U.S. Central Bank, which would now be known as the Federal Reserve.
Jekyll Island’s Secreting Meeting
Six bankers -Nelson Aldrich, A. Piatt Andrew, Henry Davison, Arthur Shelton, Frank Vanderlip, and Paul Warburg- secretly met at Jekyll Island to reform the nation’s banking system and created the foundation of what is still known today as the Federal Reserve System. They were supported by higher powers as the Fed Reserve Act was passed by both the House of Representatives and the Senate, and then later signed by President Woodrow Wilson in 1913.
Not much later, the Federal Reserve began profoundly changing the nature of money. In just its first seven years of operation, wholesale prices in the U.S. rose more than 240%, and between 1914 and 1920, the currency in circulation had increased 242,7%. Wilson regrets his decision of passing this Act and reveals it before his death, stating “I am a most unhappy man– unwittingly I have ruined my country”.
The Great Depression and Gold Hoarding
The Great Depression is the worst economic downturn in the history of the industrialized world, affecting the U.S. from 1929 to 1939. It began as a result of the Wall Street stock market crash of October 1929, causing panic and wiped out millions of investors. In 1933, seeking to stabilize the situation, President Franklin Roosevelt signed a bill ending the Gold Standard, which was the monetary system that backed the U.S. currency by gold.
Congress enacted a joint resolution nullifying the right of creditors to demand payment in gold, but bank failures during the Great Depression frightened the public and resulting in hoarding gold. In addition to this decision, Roosevelt ordered all gold coins and gold certificates in denominations of more than $100 to be confiscated and turned in for U.S. dollars, requiring the population to deliver all gold coin, gold bullion, and gold certificates at the set price of $20.67 per ounce.
Gold: Is it Good or Bad?
Roosevelt’s decision resulted in positive. In 1934, the government price of gold has increased to $35 per ounce, effectively increasing the gold on the Federal Reserve’s balance sheets by 69%. This increase was what allowed the Federal Reserve to inflate the money supply further. This continued until 1971, when President Richard Nixon abandoned the conversion of dollars to gold at a fixed value, completely rejecting the gold standard. During Nixon’s government, owning gold was illegal.
Prior to the removal of the gold cover, each Federal Reserve Bank had been required to hold a gold certificate reserve of not less than 25 percent against its Federal Reserve note liability. It took until 1974 for President Gerald Ford to sign legislation that permitted Americans to once again own gold and remove any of these restrictions.
Central Banks and the Future
As seen, central banks have both progressed and damaged the U.S. economy. For this reason, it is still unsure how central banks will act in the future and whether or not they will provide the U.S. and other leading economies with positive aspects. This becomes even more uncertain with the growth of cryptocurrencies since some people prefer the new modern option over the old system, and leave physical behind. Modern solutions allow individuals to become their own banks and excludes this middle man.