Federal Reserve Act
Federal Reserve Act
On December 23, 1913, President Woodrow Wilson (1856–1924; served 1913–21) signed the Federal Reserve Act, creating the Federal Reserve System. The purpose of the act was to promote economic stability, which had become more important as the U.S. economy grew both at home and overseas. The Federal Reserve System became the central banking authority of the United States.
Under the Federal Reserve Act, the Federal Reserve System conducts U.S. monetary policy, maintains the stability of the country's financial system, regulates banks and protects consumers’ credit rights, and provides financial services to the federal government, the public, and financial institutions located in the United States and abroad.
When the United States was first formed, the economy was based mostly on agriculture, or farming. Most citizens had little if any banking experience, and the attitude of the day was that the central government should let the people make their own decisions. At the same time, members of Congress believed a banking system was necessary to developing a stable economy, so they established the First Bank of the United States in 1791.
As the country's population increased, state laws were passed allowing state-controlled banks to open. These banks were not regulated closely or according to specific guidelines, and there were bank failures in which people lost their entire savings.
War and panic
The government made no attempt to intervene in the financial sector again until the American Civil War (1861–65). In 1863 and 1864, Congress passed National Bank Acts that created a system of privately owned banks, called national banks. These federally regulated banks issued a uniform currency nationwide, but the new system had problems because it was not designed to meet the money-supply needs of a rapidly growing economy.
In 1873 and 1907, there were financial panics as the U.S. economy fell on hard times. Unemployment was high, and public attention focused on the need for banking and monetary reform. The National Monetary Commission's investigation of the banking system resulted in the passage of the Federal Reserve Act.
The Federal Reserve Act created twelve Federal Reserve Districts, each with its own Federal Reserve Bank and Federal Reserve Board to coordinate operation for the whole system. The Federal Advisory Council was established so that commercial bankers would have representation. The council was comprised of twelve members, one from each district, who was elected by member banks of that district.
Any bank with “National Bank” in its name had to belong to the system, and state-chartered banks could become members if they were willing to invest 6 percent of their capital in the system.
The Banking Act of 1935 took care of the conflict that arose between the U.S. Treasury and the Federal Reserve System by removing the treasury secretary and comptroller of the currency from the board. That same act also established the Federal Open Market Committee (FOMC), a group made up of bank presidents and board members. The FOMC kept control of the country's money supply for more than fifty years.
In the twenty-first century, the Federal Reserve System remains an independent agency of the government. It continues to control the flow of money and credit in the U.S. economy.