By Kenneth G. Pringle

New leadership and a new policy direction at the Federal Reserve revives the eternal American debate over the purpose of -- and even the need for -- a central bank.

The debate dates to the republic's beginning. It split the Founding Fathers into two warring camps, offering two different answers to the fundamental question: What is government for?

Alexander Hamilton argued for a strong state that supported rapid industrialization, with a central bank as its linchpin. Thomas Jefferson envisioned an agrarian nation that required minimal government and no central bank.

In 1790, the secretaries of the Treasury and State took their arguments to President George Washington, who landed on Hamilton's side.

But the debate has never truly been settled.

The first Bank of the U.S. was put out of business after 20 years, and so was the second. The current central bank -- the Fed -- has been under attack since its inception more than a century ago.

President Andrew Jackson provided the rallying cry for opponents in 1832, declaring central banks "unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people."

Even today, two bills collectively known as the Federal Reserve Board Abolition Act, which echo Jackson's rhetoric, sit in congressional committees awaiting votes.

Those bills are unlikely to pass. But the debate over the central bank's role is heating up as Kevin Warsh, President Donald Trump's nominee to lead the Fed starting in May, promises " regime change" at the central bank.

It was 250 years ago when Hamilton -- "the bastard brat of a Scotch Pedler," as John Adams described him -- was developing his beliefs through both war and business.

As Washington's Revolutionary War aide-de-camp, Hamilton saw how a lack of funding nearly doomed the national cause. As a trader, he had watched the steam engine and power loom turn Britain into a global superpower.

America needed its own industrial revolution, Hamilton resolved, which could only be delivered by a strong federal government with a central bank to back it.

"Trade and industry, wherever they have been tried, have been indebted to [central banks] for important aid," Hamilton wrote in his Report on a National Bank in 1790. "And Government has been repeatedly under the greatest obligations to them, in dangerous and distressing emergencies."

Hamilton's plan also included assumption of states' debts to build national credit, subsidies to American manufacturers in key industries like defense, and tariffs or bans on corresponding imports.

Known as the American School, most of it was adopted, including the 1791 incorporation of the Bank of the U.S., "to which the faith of the United States is hereby pledged," as the bill read.

In fact, many never had faith. The debate reignited when the bank's 20-year charter came up for renewal in 1811. Hamilton was dead -- killed by Aaron Burr in an 1804 duel -- and without its champion, the bank was narrowly voted down in Congress.

But America's disastrous performance in the War of 1812 -- militiamen routed by British regulars, the capital burned, government forced to borrow from London bankers -- convinced Congress to reconsider. The Second Bank of the U.S. was chartered in 1816.

Yet it, too, had a short life. Jackson made opposition to it the centerpiece of his populist 1832 re-election campaign, igniting the Bank War.

Central banks, Jackson wrote, "make the rich richer and the potent more powerful" at the expense of "the humble members of society, the farmers, mechanics, and laborers."

Jackson won the war, vetoing the bank's recharter and gaining re-election by a landslide.

This began America's second era of banking, one without a central bank. Its distinguishing feature was financial panics: 1837, 1839, 1857, 1873, 1884, 1893, 1896, 1907. Some were worse than others, and each had a different cause, but all were magnified by bank runs.

In 1837, U.S. farmers were crushed by a collapse in global commodities prices. Unable to pay their debts, they soon found their savings gone, too, as banks went insolvent.

On May 10, New York's financial giants ran out of gold and silver. Without a U.S. central bank, Wall Street turned to the Bank of England.

"We regret to have to state, that after three days of most anxious deliberation," London's Guardian wrote on June 7, the BOE "decline[s] giving further assistance to the embarrassed American houses."

The downturn lasted into the mid-1840s and, for a time, was called the Great Depression.

Overspeculation in railroads was the culprit in 1873. The bank run began in earnest after the bankruptcy of Jay Cooke, the man who had financed the Union's Civil War victory. This Great Depression lasted until 1877.

The Panic of 1907 provided all-too-familiar scenes across the nation. "Crowds of Depositors Begged and Fought for Their Money," Lewiston Maine's Evening Journal wrote on Oct. 22 of riots that followed the failure of New York's Knickerbocker Trust.

This crisis was resolved only through the intervention of J. Pierpont Morgan, Wall Street's leading financier, who along with fellow bankers snapped up distressed assets for pennies on the dollar.

That "was the last straw," former Fed Chair Ben Bernanke writes in his history, 21st Century Monetary Policy. "Congress grew determined to revisit the idea of a central bank."

The Federal Reserve System was established in 1913, with the express purpose of preventing bank runs. It saw America through the Roaring '20s until, in October 1929, the market crashed. This provided the Fed with its first real test.

It failed.

Instead of fulfilling its role as lender of last resort, the Fed stood by as banks folded, one after another -- 11,000 by 1933. Recession deepened into depression.

The Fed's failure was catastrophic.

"The Crash hurt people who had bought common stocks on margin," wrote Fred Schwed Jr. in his classic market study, Where Are the Customers' Yachts? , "the depression hurt just about everyone who was alive and some not yet born."

The Great Depression retains that designation largely because modern monetary theory was formulated to avoid the mistakes of the 1930s. Fed chiefs since Paul Volcker (1979-87) have followed a similar playbook.

"We're very sorry," Bernanke once quipped of the Depression-era blunders, "we won't do it again."

Some believe the actions of Bernanke's Fed prevented the financial crisis of 2008 from descending into a new Great Depression. Warsh was a member of that Fed board, even if he later became a critic.

The question is how the Fed responds to the future financial crises -- assuming there is a Fed to respond.

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February 11, 2026 01:00 ET (06:00 GMT)

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