Chapter 11, Problem 1Q

To determine

The reason why the United States was one of the last major industrialized countries to have a central bank

Introduction:

Central bank works as an independent authority which helps to regulate monetary as well as fiscal policies in the economy. It is responsible to maintain the overall balance of all the macroeconomic variables in the economy.

Explanation of Solution

United States is one of the developed nations and had the highest growth rate at a time which was impossible to achieve.

However, United States was one of the last major industrialized countries to have a central bank because of the agricultural and other interests that were quite doubtful and the fear of centralized power and hence, demanded state banks.

In addition, their distrust of the central banking led them to exert political pressure in order to eliminate the bank of the United States, and in 1811 they efforts met with progress and charter were not re-established. In light of misuse by state banks and the reasonable requirement for a national bank to enable the central government to raise reserves amid the war of 1812, Congress was invigorated to make the Second Bank of the United States in 1816.

Thus, until 1863, all commercial banks in the United States were chartered by the banking commission of the state in which each bank operated, no national currency existed and there was no establishment of a Central bank.

The National Bank Act of 1863 created a new banking system of federally chartered banks called National Banks in order to eliminate the abuses of state chartered banks called State banks and resulted in a dual banking system in the United States. Central bank did not reappear in this country until the Federal Reserve System was created in 1913 to promote an even safer banking system.