Cameron Miranda
The Federal Reserve Act, passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913, created the Federal Reserve System, the central banking system of the United States. The Federal Reserve Act was the result of a hard-fought battle to balance competing views on the role of government in the banking system, creating a hybrid public-private, centralized-decentralized structure. The Federal Reserve System includes the Board of Governors, a federal agency located in Washington, D.C., and twelve Federal Reserve Banks, jointly responsible for managing the country's money supply and promoting the health and stability of the U.S. economy and financial system.
| Characteristics | Values |
|---|---|
| Name of the law | Federal Reserve Act |
| Year passed | 1913 |
| Date signed into law | December 23, 1913 |
| Signed by | President Woodrow Wilson |
| Type of control | Hybrid public-private, centralized-decentralized structure |
| Number of Federal Reserve Banks | 12 |
| Purpose | To enhance the stability of the American banking system |
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![The Federal Reserve Act of 1913: History and Digest [1914 ]](https://m.media-amazon.com/images/I/51v5wobfZ-L._AC_UY218_.jpg)
What You'll Learn
The Federal Reserve Act of 1913
The Federal Reserve Act came about after the Democrats gained unified control of Congress and the presidency in the 1912 elections. President Wilson, Congressman Carter Glass, and Senator Robert Latham Owen crafted a central banking bill that struck a balance between private control and government control of the central banking system. Wilson made passing the bill a priority, and it was approved by both houses of Congress without significant changes.
The establishment of the Federal Reserve addressed the absence of a central banking structure in the United States, which had previously led to immobile reserves and an inelastic currency. The Federal Reserve was given the power to regulate inflation, and its creation had significant implications for the internationalization of the US dollar as a global currency. It also allowed national banks to make mortgage loans for farmland, which was previously prohibited.
The Federal Reserve Act has been amended numerous times since its enactment. For example, amendments were made to accommodate the admission of Hawaii and Alaska into the Union and to restructure the Fed's districts. In 1917, during World War I, amendments were passed to enable monetary expansion, allowing for a more flexible definition of the gold backing the dollar and resulting in an increase in the currency in circulation.
The Federal Reserve Act continues to be one of the principal banking laws in the United States, shaping the country's monetary policy and financial stability.
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The Aldrich Plan
Despite the mixed reactions, the Aldrich Plan formed the basis for the Federal Reserve Act, which was passed in 1913 and created the Federal Reserve System, the central banking system of the United States. The final legislation reflected a compromise between the competing interests of private banks and populist sentiment, with a decentralized structure that balanced private and government control.
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The National Monetary Commission
The commission's reports contained proposed recommendations and draft legislation to establish a national reserve association in the United States. The plan proposed by the commission provided for the establishment of local associations of banks, which would be grouped into regional associations, and further grouped into a national reserve association with a head office in Washington. The functions of this national reserve association would be similar to those performed by the great central banks of Europe, including holding and administering bank reserves, issuing an elastic currency based on commercial assets, and rediscounting commercial paper for banking institutions.
The commission believed that its plan for a national reserve association would prevent the domination of the association by any group of interests, whether political or financial. However, the plan failed to gain strong public support due to its resemblance to a central bank and the public's suspicion of its main author, Senator Aldrich.
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The Federal Reserve System
The Federal Reserve Act, passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913, created the Federal Reserve System, the central banking system of the United States. The Federal Reserve System includes the Board of Governors, a federal agency located in Washington, D.C., and 12 Federal Reserve Banks operating across the nation. The Federal Reserve System performs five key functions that serve all Americans and promote the health and stability of the U.S. economy and financial system.
Firstly, it conducts the nation's monetary policy. The Federal Open Market Committee (FOMC), the Federal Reserve's monetary policy body, implements unconventional monetary policy tools such as forward policy guidance and large-scale asset purchases, also known as quantitative easing (QE). The FOMC also includes representatives from the remaining seven Reserve Bank presidents. Secondly, the Federal Reserve System promotes financial system stability. Thirdly, it supervises and regulates financial institutions, enforcing compliance with federal consumer protection and fair lending laws while promoting local community development. Fourthly, it fosters payment and settlement system safety and efficiency, including distributing currency and coins to banks, operating electronic payment systems, and clearing checks. Finally, it acts as the "government's bank" by providing services such as maintaining the Treasury Department's transaction account and issuing and redeeming U.S. government securities.
The Federal Reserve Act was shaped by political compromise, balancing the competing interests of private banks and populist sentiment. It has been amended by some 200 subsequent laws of Congress, reflecting the ongoing battle to balance the views of those who favour a central bank under public control and those who prefer banker control.
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The role of President Woodrow Wilson
The Federal Reserve Act, passed by the 63rd United States Congress, was 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.
President Woodrow Wilson played a significant role in the creation of the central bank of the United States. After the Democrats gained control of Congress and the presidency in the 1912 elections, Wilson, along with Congressman Carter Glass and Senator Robert Latham Owen, crafted a central banking bill. This bill aimed to strike a balance between the Aldrich Plan, which advocated for private control of the central banking system, and the progressive view led by William Jennings Bryan, who favoured government control. Wilson's priority was to ensure that the banking system was "public, not private" and under the control of the government.
Wilson's administration sought expert advice from Virginia Rep. Carter Glass and H. Parker Willis, an economics professor at Washington and Lee University. Glass and Willis worked throughout 1912 on a central bank proposal, presenting their plan to Wilson in December of that year. The proposal underwent modifications and debates until December 1913, when it was signed into law by Wilson.
Wilson made the central banking bill a central part of his New Freedom domestic agenda. He played a crucial role in ensuring the bill passed through both houses of Congress without significant amendments. The bill faced stronger opposition in the Senate, where Wilson had to convince Democrats to reject an amendment by bank president Frank A. Vanderlip, which sought to grant private banks greater control. Ultimately, the Senate approved the Federal Reserve Act by a vote of 54-34.
Wilson's signing of the Federal Reserve Act was the culmination of three years of discussions and debates following the financial panic of 1907. The absence of a central banking structure in the US prior to this Act left the country's financial system vulnerable to economic crises. Wilson's role in the creation of the central bank was a significant legislative accomplishment of his administration, addressing the need for a strong banking system to provide credit and stability to the growing economy.
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Frequently asked questions
The Federal Reserve Act of 1913.
To establish a monetary system that could respond effectively to stresses in the banking system.
The Federal Reserve System included 12 Federal Reserve Banks and a controlling interest in the system was placed in a central board filled with presidential appointees.
The Federal Reserve System performed five key functions that served all Americans and promoted the health and stability of the U.S. economy and financial system.
Various financial panics, particularly a severe one in 1907, persuaded Americans that the country needed some sort of banking and currency reform.
