Federal Reserve Act: Difference between revisions
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The '''Federal Reserve Act''' was passed by the [[63rd United States Congress]] and signed into law by President [[Woodrow Wilson]] on December 23, 1913. The law created the [[Federal Reserve System]], the [[central bank]]ing system of the [[United States]]. | The '''Federal Reserve Act''' was passed by the [[63rd United States Congress]] and signed into law by President [[Woodrow Wilson]] on December 23, 1913. The law created the [[Federal Reserve System]], the [[central bank]]ing system of the [[United States]]. | ||
After Democrats won unified control of Congress and the presidency in the [[1912 United States elections|1912 elections]], President Wilson, Congressman [[Carter Glass]], and Senator [[Robert Latham Owen]] crafted a central banking bill that occupied a middle ground between the [[Aldrich Plan]], which called for private control of the central banking system, and [[Progressivism in the United States|progressives]] like [[William Jennings Bryan]], who favored government control over the central banking system. Wilson made the bill a top priority of his [[The New Freedom|New Freedom]] domestic agenda, and he helped ensure that it passed both houses of Congress without major amendments. | |||
The Federal Reserve Act created the Federal Reserve System, consisting of twelve regional [[Federal Reserve Bank]]s jointly responsible for managing the country's [[money supply]], making loans and providing oversight to banks, and serving as a [[lender of last resort]]. To lead the Federal Reserve System, the act established the [[Federal Reserve Board of Governors]], members of which are appointed by the president. The [[1933 Banking Act]] amended the Federal Reserve Act to create the [[Federal Open Market Committee]], which oversees the Federal Reserve's [[open market operation]]s. A later amendment requires the Federal Reserve "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." | The Federal Reserve Act created the Federal Reserve System, consisting of twelve regional [[Federal Reserve Bank]]s jointly responsible for managing the country's [[money supply]], making loans and providing oversight to banks, and serving as a [[lender of last resort]]. To lead the Federal Reserve System, the act established the [[Federal Reserve Board of Governors]], members of which are appointed by the president. The [[1933 Banking Act]] amended the Federal Reserve Act to create the [[Federal Open Market Committee]], which oversees the Federal Reserve's [[open market operation]]s. A later amendment requires the Federal Reserve "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." | ||
== Overview == | == Overview == | ||
The Federal Reserve Act created a system of private and public entities. There were to be at least eight and no more than twelve private regional Federal Reserve banks. [[Federal Reserve Bank|Twelve were established]], and each had various branches, a board of directors, and district boundaries. The Federal Reserve Board, consisting of seven members, was created as the governing body of the Fed. Each member is appointed by the U.S. president and confirmed by the U.S. Senate. In 1935, the Board was renamed and restructured. Also created as part of the Federal Reserve System was a 12-member Federal Advisory Committee and a single new United States currency, the [[Federal Reserve Note]]. The Federal Reserve Act created a national currency and a monetary system that could respond effectively to the stresses in the banking system and create a stable financial system. With the goal of creating a national monetary system and financial stability, the Federal Reserve Act also provided many other functions and financial services for the economy, such as check clearing and collection for all members of the Federal Reserve. | The Federal Reserve Act created a system of private and public entities. There were to be at least eight and no more than twelve private regional Federal Reserve banks. [[Federal Reserve Bank|Twelve were established]], and each had various branches, a board of directors, and district boundaries. The Federal Reserve Board, consisting of seven members, was created as the governing body of the Fed. Each member is appointed by the U.S. president and confirmed by the U.S. Senate. In 1935, the Board was renamed and restructured. Also created as part of the Federal Reserve System was a 12-member Federal Advisory Committee and a single new United States currency, the [[Federal Reserve Note]]. The Federal Reserve Act created a national currency and a monetary system that could respond effectively to the stresses in the banking system and create a stable financial system. The goal of the system was to ensure that there would always be a supply of money and credit in times of financial strain.<ref>{{Cite journal |last=Sprague |first=O. M. W. |date=1914 |title=The Federal Reserve Act of 1913 |url=https://www.jstor.org/stable/1883621 |journal=The Quarterly Journal of Economics |volume=28 |issue=2 |pages=213–254 |doi=10.2307/1883621 |issn=0033-5533}}</ref> With the goal of creating a national monetary system and financial stability, the Federal Reserve Act also provided many other functions and financial services for the economy, such as check clearing and collection for all members of the Federal Reserve. | ||
With the passing of the Federal Reserve Act, Congress required that all nationally chartered banks become members of the Federal Reserve System. These banks were required to purchase specified non-transferable stock in their regional Federal Reserve banks, and to set aside a stipulated amount of non-interest bearing reserves with their respective reserve banks. Since 1980, all depository institutions have been required to set aside reserves with the Federal Reserve. Such institutions are entitled to certain Federal Reserve services. State chartered banks were given the option of becoming members of the Federal Reserve System and in the case of the exercise of such option were to be subject to supervision, in part, by the Federal Reserve System. Member banks became entitled to have access to discounted loans at the [[discount window]] in their respective reserve banks, to a 6% annual dividend in their Federal Reserve stock, and to other services. | With the passing of the Federal Reserve Act, Congress required that all nationally chartered banks become members of the Federal Reserve System. These banks were required to purchase specified non-transferable stock in their regional Federal Reserve banks, and to set aside a stipulated amount of non-interest bearing reserves with their respective reserve banks. Since 1980, all depository institutions have been required to set aside reserves with the Federal Reserve. Such institutions are entitled to certain Federal Reserve services. State chartered banks were given the option of becoming members of the Federal Reserve System and in the case of the exercise of such option were to be subject to supervision, in part, by the Federal Reserve System. Member banks became entitled to have access to discounted loans at the [[discount window]] in their respective reserve banks, to a 6% annual dividend in their Federal Reserve stock, and to other services. | ||
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In the aftermath of the [[Panic of 1907]], there was general agreement among leaders in both parties of the necessity to create some sort of central banking system to provide coordination during financial emergencies. Most leaders also sought currency reform, as they believed that the roughly $3.8 billion in coins and [[banknote]]s did not provide an adequate money supply during financial panics. Under conservative Republican Senator [[Nelson Aldrich]]'s leadership, the [[National Monetary Commission]] had put forward a plan to establish a central banking system that would issue currency and provide oversight and loans to the nation's banks. However, many progressives distrusted the plan due to the degree of influence bankers would have over the central banking system.<ref>{{Cite book |author-link=Christopher W. Shaw|last=Shaw |first=Christopher W. |title=Money, Power, and the People: The American Struggle to Make Banking Democratic |url=https://press.uchicago.edu/ucp/books/book/chicago/M/bo38871708.html |publisher=University of Chicago Press |year=2019 |isbn=978-0226636337 |location=Chicago |pages=75–82}}</ref> Relying heavily on the advice of [[Louis Brandeis]], Wilson sought a middle ground between progressives such as [[William Jennings Bryan]] and conservative Republicans like Aldrich.<ref>Clements 1992, pp. 40–42</ref> He declared that the banking system must be "public not private, [and] must be vested in the government itself so that the banks must be the instruments, not the masters, of business."<ref>Heckscher 1991, pp. 316-17.</ref> | In the aftermath of the [[Panic of 1907]], there was general agreement among leaders in both parties of the necessity to create some sort of central banking system to provide coordination during financial emergencies. Most leaders also sought currency reform, as they believed that the roughly $3.8 billion in coins and [[banknote]]s did not provide an adequate money supply during financial panics. Under conservative Republican Senator [[Nelson Aldrich]]'s leadership, the [[National Monetary Commission]] had put forward a plan to establish a central banking system that would issue currency and provide oversight and loans to the nation's banks. However, many progressives distrusted the plan due to the degree of influence bankers would have over the central banking system.<ref>{{Cite book |author-link=Christopher W. Shaw|last=Shaw |first=Christopher W. |title=Money, Power, and the People: The American Struggle to Make Banking Democratic |url=https://press.uchicago.edu/ucp/books/book/chicago/M/bo38871708.html |publisher=University of Chicago Press |year=2019 |isbn=978-0226636337 |location=Chicago |pages=75–82}}</ref> Relying heavily on the advice of [[Louis Brandeis]], Wilson sought a middle ground between progressives such as [[William Jennings Bryan]] and conservative Republicans like Aldrich.<ref>Clements 1992, pp. 40–42</ref> He declared that the banking system must be "public not private, [and] must be vested in the government itself so that the banks must be the instruments, not the masters, of business."<ref>Heckscher 1991, pp. 316-17.</ref> | ||
Democratic Congressman [[Carter Glass]] and Senator [[Robert L. Owen]] crafted a compromise plan in which private banks would control twelve regional [[Federal Reserve Bank]]s, but a controlling interest in the system was placed in a central board filled with presidential appointees. The system of twelve regional banks was designed with the goal of diminishing [[Wall Street]]'s influence. Wilson convinced Bryan's supporters that the plan met their demands for an elastic currency because Federal Reserve notes would be obligations of the government.<ref>Link 1954, pp. 43–53</ref> The bill passed the House in September 1913, but it faced stronger opposition in the Senate. After Wilson convinced just enough Democrats to defeat an amendment put forth by bank president [[Frank A. Vanderlip]] that would have given private banks greater control over the central banking system, the Senate voted 54–34 to approve the Federal Reserve Act. Wilson signed the bill into law in December 1913.<ref>Clements 1992, pp. 42–44</ref> | Democratic Congressman [[Carter Glass]] and Senator [[Robert L. Owen]] crafted a compromise plan in which private banks would control twelve regional [[Federal Reserve Bank]]s, but a controlling interest in the system was placed in a central board filled with presidential appointees.<ref>{{Cite journal |last=Willis |first=Henry Parker |date=1914 |title=The Federal Reserve Act |url=https://www.jstor.org/stable/1804981 |journal=The American Economic Review |volume=4 |issue=1 |pages=1–24 |issn=0002-8282}}</ref> The system of twelve regional banks was designed with the goal of diminishing [[Wall Street]]'s influence. Wilson convinced Bryan's supporters that the plan met their demands for an elastic currency because Federal Reserve notes would be obligations of the government.<ref>Link 1954, pp. 43–53</ref> The bill passed the House in September 1913, but it faced stronger opposition in the Senate. After Wilson convinced just enough Democrats to defeat an amendment put forth by bank president [[Frank A. Vanderlip]] that would have given private banks greater control over the central banking system, the Senate voted 54–34 to approve the Federal Reserve Act. Wilson signed the bill into law in December 1913.<ref>Clements 1992, pp. 42–44</ref> | ||
== Amendments == | == Amendments == | ||
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[[Category:Presidency of Woodrow Wilson]] | [[Category:Presidency of Woodrow Wilson]] | ||
[[Category:1913 in economic history]] | [[Category:1913 in economic history]] | ||
[[Category:December 1913 | [[Category:December 1913]] | ||