BADM 300- Midterm Exam
Term 1: Spring 2012
1/3. The United States was one of the last major industrialized nations to form a Central Bank because of distrust in a central government agency. One can see this throughout the history of efforts to create the Central Bank (First Bank, Second Bank, and finally the National Bank). This is also why the Federal Reserve Bank System set up twelve Regional Banks rather than having only one. The First Bank of the United States was created to fix the debt caused by the Revolutionary war. Although the original intent of the First Bank was to finance the government, Alexander Hamilton decided to make it a commercial bank as well, meaning a for-profit bank. Although this allowed Hamilton to loan money to business owners, many argued this idea was unconstitutional as it allowed a private institution the power to tax and print money. Therefore, in 1811, having “taken care of the national debt,” Congress refused to renew the Bank’s charter (by one vote), causing it to shut down. After just 5 years, due to the War of 1812, the national debt began to accumulate once again, and the Congress saw another need for a national bank. Acting as a regulator for state-chartered banks and a whole lot bigger in size (35 million dollar capital compared to the First Bank’s 10 million), the Second Bank was established in 1816. The main reason for the downfall of the Second Bank was primarily the cause of President Andrew Jackson. Since the beginning, Jackson announced his opposition to the bank and eventually the banks chartered having not being renewed, expired in 1836. Up until the Civil War, United States ran on what is commonly called the free banking system. This allowed state-chartered banks to print their own money and have minimum regulation on their loans. Due to the debt caused by the Civil War, United States was forced to renew the idea of a national bank. The new policy allowed banks to choose between being nationally chartered or state-chartered. In 1865, state notes were taxed out of existence resulting in the first national currency. Finally, the Federal Reserve act of 1913 can be deciding date for the formation of the Central Bank. The president at the time, Wilson, appointed two people, Carter Glass and Parker Willis, to create a proposal for the new banking system. After tremendous debate from December 1912 to December 1913, President Woodrow Wilson signed the Federal Reserve Act into law, creating a “decentralized central bank.” Therefore, one can argue because of the long-standing tradition of distrust of centralized power, it took a long time to set up a equal way of spreading power. In conclusion the Fed was spread across regional banks to prevent power from being concentrated in one location or by one interest group.
2. If the Reserve Requirements at the USA’s Federal Reserve Bank were eliminated, the size of the Money Market Mutual Funds would surely increase. Eliminating the Reserve Requirements would directly increase the amount of money supply. By increasing the money supply, there can be better opportunities of other investments, such as those offered by the Money Market Mutual Funds. Overall, the size of the whole market increases. One can also compare the Fed with Money Market Mutual Funds as different brand names. For example, imagine the Fed was Nike and Money Market Mutual Funds was Adidas. Taking money out of the safe from Nike would in turn eliminate the whole company, which would then lead to investors investing in Adidas. Or, if not eliminating the whole company, taking money from Nike would lead to more money in the market allowing more money to be spent on Adidas.
4. The structure of the Federal Reserve was carefully designed to incorporate the concepts of checks and balances. Its decentralized system and range of board members eliminates the chances of any one group having too much control. Each of the Federal Reserve’s...
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