The Federal Reserve Act: A Historical Law

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 banking system of the United States. The Act was passed after years of economic turmoil in the country, with the goal of establishing economic stability by introducing a central bank to oversee monetary policy. The Federal Reserve Act is one of the most influential laws concerning the U.S. financial system, providing the nation with a safe, flexible, and stable monetary and financial system.

The Federal Reserve Act of 1913

The Federal Reserve Act was passed by the 63rd United States Congress, creating the Federal Reserve System, the central banking system of the United States. The Act was the result of three years of discussion and debate, following the financial panic of 1907, which saw the stock market collapse, banks fail, and credit dry up. This event highlighted the need for a central bank, as the federal government lacked the tools to respond effectively, having to rely on private bankers such as J.P. Morgan to provide an infusion of capital to stabilise the banking system.

The Act created a system of private and public entities, with at least eight and no more than twelve private regional Federal Reserve Banks, each with its own branches, board of directors, and district boundaries. The Federal Reserve Board, consisting of seven members, was established as the governing body of the Fed, with each member appointed by the U.S. president and confirmed by the U.S. Senate. The Act also created a 12-member Federal Advisory Committee and established a single new U.S. currency, the Federal Reserve Note.

The Federal Reserve Act gave the Fed the ability to print money and provided policy tools to ensure economic stability, including the ability to adjust the discount rate and the Fed funds rate, and to buy and sell U.S. Treasuries. The Act also created the dual mandate to maximise employment and keep prices stable.

The Federal Reserve System was designed to provide the nation with a safer, more flexible, and more stable monetary and financial system. It was intended to address the problem of an "inelastic currency" and to create a stable financial system that could respond effectively to stresses in the banking system. The Act also provided for functions such as check clearing and collection for all members of the Federal Reserve.

The Federal Reserve Act is considered one of the most influential laws concerning the U.S. financial system, shaping monetary policy and providing oversight and stability to the nation's economy.

The Federal Reserve System

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 Act created the Federal Reserve System, also known as the Fed, which serves as the central banking system of the United States. This legislation came about after years of economic turmoil and financial crises in the country, including the Panic of 1907, which highlighted the need for a central banking authority.

The Federal Reserve Act was designed to bring stability to the country's financial system and address issues of economic uncertainty. It provided the Federal Reserve with the ability to print money and adjust key interest rates, such as the discount rate and the Fed funds rate. Additionally, the Act created a dual mandate for the Fed to maximize employment and maintain stable prices.

The establishment of the Federal Reserve System was a significant development in the history of the United States, as it addressed the challenges posed by a lack of centralized banking regulation. The system aims to ensure the safety and stability of the monetary and financial systems in the country, while also providing flexibility to respond to economic fluctuations.

Central banking

The absence of a central banking structure in the U.S. before the Federal Reserve Act of 1913 left the country's financial system characterised by immobile reserves and inelastic currency. Financial panics were common, with investors unsure of the safety of their bank deposits. Private financiers like J.P. Morgan often provided lines of credit to stabilise the financial sector.

The Panic of 1907, which saw the stock market collapse and credit evaporate, convinced many Americans of the need for a central banking system. The Federal Reserve Act, passed by Congress and signed into law by President Woodrow Wilson on December 23, 1913, established the Federal Reserve System as the country's central banking system. The Act created a system of private and public entities, consisting of twelve regional Federal Reserve Banks jointly responsible for managing the country's money supply, making loans, and providing oversight to banks.

The Federal Reserve Act gave the Federal Reserve System the ability to print money and the policy tools to ensure economic stability. It also established the Fed's dual mandate for maximum employment and price stability. The Act has been amended numerous times since its passage and remains one of the most influential laws shaping the U.S. financial system.

The Aldrich Plan

The plan was controversial. It was supported by most Republicans and Wall Street bankers, but it faced strong opposition from rural and western states, who feared it would become a tool of bankers, particularly the Money Trust of New York City. The plan was also criticised for giving too little power to the government, with only six of the 46 board members appointed by the government, and one of those—the head of the organisation—selected from a list supplied by the association.

The origins of the Aldrich Plan can be traced back to a secret meeting on Jekyll Island, Georgia, in November 1910. The meeting was organised by bankers and financiers who recognised the need for a central bank in the US and wanted to begin the process of establishing one. Attendees included Senator Aldrich, investment banker Paul Warburg, Treasury official Abram Piatt Andrew, and executives from several powerful banking institutions. They knew that a plan crafted by bankers was unlikely to be welcomed by the public, so they went to great lengths to keep the meeting a secret. Warburg directed the proceedings and wrote the primary features of what became known as the Aldrich Plan.

Amendments to the Act

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 Act created the Federal Reserve System, which consists of twelve regional Federal Reserve Banks jointly responsible for managing the country's money supply, making loans, and providing oversight to banks.

The Federal Reserve Act has been amended numerous times since its enactment in 1913. Here are some of the significant amendments:

• Inclusion of Alaska and Hawaii: The Act was amended to include Alaska and Hawaii as part of the Federal Reserve System when they became states.
• Restructuring of Districts: The Federal Reserve's districts were restructured, and their jurisdictions were specified.
• Creation of the Federal Open Market Committee (FOMC): In 1933, the Banking Act of 1933 amended the Federal Reserve Act to establish the FOMC. The FOMC is composed of seven members of the Board of Governors of the Federal Reserve System and five representatives from the Federal Reserve Banks. It oversees the Federal Reserve's open market operations and meets at least four times a year.
• Monetary Expansion during World War I: In June 1917, amendments were made to enable monetary expansion to cover the costs of the US's involvement in World War I. The amendments allowed for a more flexible definition of the gold backing the dollar, leading to an increase in currency circulation.
• Charter Amendment: On February 25, 1927, the Federal Reserve Banks' original twenty-year charter was amended to allow for succession until dissolved by an Act of Congress or violation of law.
• Stable Prices and Employment: On November 16, 1977, an amendment was passed requiring the Board and the FOMC to promote maximum employment, stable prices, and moderate long-term interest rates. This amendment also mandated semi-annual hearings for the Chairman to report to Congress on monetary policy, economic development, and future prospects.
• Other Amendments: The Federal Reserve Act has been amended by over 200 subsequent laws, addressing various sections of the Act, such as stock issues, branch offices, Federal Reserve Banks, and more.

Frequently asked questions