Certain defects in the national banking system appeared early, particularly in the geographical distribution of the banks and in the reduction of national bank note circulation as the national bonds were paid off. The inability of the system to meet and stem panics had been demonstrated in 1884, 1890, and 1893. During 1893 an acute scarcity of currency started the reform movement which has culminated in the federal reserve. At the meeting of the American Bankers' Association at Baltimore in
1893 a plan for a currency protected by a joint guaranty fund contributed by all the banks was advocated; this "Baltimore plan" of "currency reform" was based on the Canadian system. In 1896 the reform of the banking currency became involved with the question of bimetallism versus the gold standard. The Indianapolis Currency Commission, a body composed of representatives of boards of trade and commercial organizations, recommended the establishment of the gold standard, the segregation of the reserve gold fund against greenbacks and its automatic repletion by issue of bonds, and the issue of bank notes based upon commercial paper and protected in several ways. The Gold Standard Act of 1900 accomplished the first two of these recommendations, and further provided for the refunding of the government bonds into 2 per cent consols and the establishment of national banks with a smaller capitalization than had been allowed theretofore, and permitted the issue of notes up to 100 per cent instead of 90 per cent of the par value of the bonds. This legislation temporarily satisfied the demand for currency, but it did not remedy any of the inherent defects of the national bank plan.
The aim of reform henceforth was to reorganize the system completely. In 1901 and succeeding years the Banking and Currency Committee of the House of Representatives presented bills to establish an elastic currency and a centralized banking system. Several banking students advocated in private circulars, in the press, and in Congressional bills, various schemes of centralization.
The movement thus well under way was precipitated by the panic of 1907. In the spring of 1908 the Banking and Currency Committee of the House reported the Fowler Bill advocating the issue of currency based on commercial paper, and the Senate Committee on Finance reported the Aldrich Bill advocating the issue of notes against other kinds of bonds than United States bonds. As a compromise, the Aldrich-Vreeland Act of May 30,
1908, was passed, providing for the issue of currency based on commercial paper by associations of banks known as "national currency associations," and for the issue of national bank notes based on deposits of special kinds of municipal and other bonds. This act, which was regarded as a makeshift on the eve of a presidential election, provided for a National Monetary Commission with wide powers to make an investigation of the currency and banking situation and report to Congress. The commission made an extensive investigation and published an excellent series of books with the object of helping to educate the business and financial world in the banking problem. In 1910 Senator Aldrich presented in a bill the outlines of the Aldrich or Monetary Commission plan. A Republican Congress meanwhile had become Democratic in character and the Aldrich Bill in consequence died in committee. The Democratic Banking and Currency Committee of the House, out of the vast amount of information assembled, and with the help of the Aldrich, Fowler, Muehlman, and other bills, prepared, during 1912 and 1913, a preliminary draft of what later became the Federal Reserve Act. After three months of consideration and amendment the measure passed Congress and was signed by the President on December 23, 1913. It is known as the Currency Act, or more commonly and properly the Federal Reserve Act, and is the most important piece of financial legislation since the National Bank Act of 1863.