The Primary Reasons for the Creation of Central Banks Especially in th Essay

The Primary Reasons for the Creation of Central Banks Especially in the U.S - Essay Example Another reason to create the central bank was to restrict the practice of small independent banks to open branches across the state boundaries. Actually, with the significant decentralization of the banking system of US, the problems increased especially during the recession, when the multi-bank panics and frequent bank collapses happen. For example, between the closure of the Second Bank of the United States and in the late years of first decade of the twentieth century, total nine multi-bank panics happened. In consideration to the frequent collapses of small banks, the need of a structure of central bank with regional banks was identified. Eventually, after the panic of 1907, in 1913 a commission of inquiry was set up and the Federal Reserve Act was passed. In the absence of a central bank in the 19th century, the federal government used to act its own banker and the treasury could favor the specific geographic, economic and financial interests. Therefore, another aim of creating central banks was to finance and meet the centralized needs of the Treasury. The central bank of the United State, Fed was set up with an aim that it could operate independent of both the private financial business interests and duly constituted government authorities. The key players in shaping the Federal Reserve Act were Glass Steagall Act 1933 and Regulation Q. These two key players not only allowed the Federal Reserve Bank to reduce the riskiness of system but they also enhanced the authority of Federal Reserve Bank. It was being assumed before the creation of regional fed banks that central banks are too large and it was against the democratic ideals of the USA for example, in 1832, USA president argued that Second Bank of US had given the power to few irresponsible people. Actually, the establishment of a central banking system has always been parallel with the fear of excessive control from the centre. Therefore, rather than setting up a single bank, the Federal Reserve Act established a system of twelve regional Federal Reserve Banks overseen by a Federal Reserve Board.