Federal Reserved: with a still-weak economy seven years after the 2008 crisis, it's worth thinking about whether we might be stuck with a twentieth-century central bank in a twenty-first-century world.

• Author: Cooper, Ryan
• Position: Book review

America's Bank: The Epic Struggle to Create the Federal Reserve

by Roger Lowenstein

Penguin Press, 368 pp.

Remember when central banking was boring? When it was one of those issues, like a house's wiring, that seemed unimportant so long as it was working as advertised? No longer. When the financial crisis of 2008 was quickly followed by the deepest recession in eighty years, central banking suddenly became important. Whether it's Federal Reserve head Janet Yellen's chronic fretting about when to start raising interest rates, or the European Central Bank's coercion of Greece's recalcitrant leftist government, understanding central banking is now vital to understanding basic politics.

That's a particularly difficult task in the United States, because of the bizarre structure of our central bank, the Federal Reserve. Its hybrid of private and public institutions is unique in the world, and extremely complicated. America's Bank: The Epic Struggle to Create the Federal Reserve, a new book by the financial writer Roger Lowenstein about the early legal history of the Fed, is a lively and thought-provoking look at the function of American central banking as well as the politics of the day.

Lowenstein's story begins back in the glory days of "wildcat" banking after Andrew Jackson killed the Second Bank of the United States in 1836. In those days, there was no federal regulation of banks (though states had their own rules). Just about anyone could start up a bank and begin issuing notes, and as a result there were literally tens of thousands of different currencies. Financial panics were common, and there was a chronic shortage of good currency.

This rickety and erratic system was replaced by the National Banking Act during the Civil War, which established a system of stronger national banks. These would issue a uniform currency, as well as buy lots of government bonds to finance the war. It was a marked improvement from the previous era, but still had many weaknesses.

One problem was that the system had no mechanism to adjust the supply of money to the needs of production. This was particularly bad for farmers (who, in 1900, comprised 38 percent of the labor force), who have to spend a lot of money within a short time to bring in the annual harvest. Without a smooth supply of credit, interest rates would sometimes spike to 100 percent.

Financial stability was an even bigger problem. Bank reserves could be kept in vaults or sent up to the bigger and...