How The Federal Reserve Battles Recession

Historically, capitalistic societies have gone through boom and bust cycles on a regular basis. The economic good times are enjoyable for everyone involved, but sometimes the exuberance can lead to downturns which are often painful. The Federal Reserve was created to help moderate the effects of an economic contraction and was given some powerful tools to affect the money supply and keep the economy out of recession.

The establishment of a Central Bank went through many convolutions prior to becoming a non partisan guardian of monetary policy. During the American Revolution, the Continental Congress printed the new nation's first paper money, known as "continentals�. Later, at the urging of Treasury Secretary Alexander Hamilton, Congress established the First Bank of the United States, headquartered in Philadelphia, in 1791. By 1811, with a backlash toward the large banking establishment brewing, the bank's 20-year charter expired and Congress refused to renew it by one vote.

By 1816, Congress agreed to charter the Second Bank of the United States, but Andrew Jackson, a central bank foe, was elected president in 1828 and he was successful in allowing the charter to expire. State-chartered banks and unchartered "free banks" took hold and began issuing their own notes, redeemable in gold. The New York Clearinghouse Association was established in 1853 to provide a way for the city's banks to exchange checks and settle accounts.