Federal Reserve Act of 1913 | 2022

The Federal Reserve Act of 1913 laid the foundation for the operation of the American banking system. Thanks to it, the United States was able to have a central bank that could execute monetary policy and carry out banking supervision.

The purpose of the Federal Reserve Act was to provide stability to the US economy through the creation of a large central bank. Said law, approved by the United States Congress in 1913, is one of the most important laws of economic significance and allowed to establish order in the North American financial system.

Background to the Federal Reserve Act of 1913

The Americans tried to establish a central bank in 1791 under the presidency of George Washington, although the experience only lasted 20 years. Later, in 1836, with Andrew Jackson as president, the second attempt to create a central bank was frustrated.

At the beginning of the 20th century, several financial panics had devastated the United States. Among these bank panics, the one of 1907 stands out. As a consequence, the US economy was on the brink of collapse. In fact, banks like JP Morgan had to step in to bail out the US government and provide credit to provide some financial stability.

To bring stability to the US economy and prevent future financial panics, bankers and politicians met in secret in 1910. Thus, the people gathered were inspired by the central banks of European countries.

Republican Senator Nelson Aldrich contacted the top five banks in the United States. Meeting in secret at the Jekyll Island Club in Georgia, they decided it was time to create a large central bank that would be under the supervision and control of private banking.

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However, Senator Aldrich’s ideas were met with rejection by Congress. It would have to wait until 1913, when Congress finally authorized the creation of the Federal Reserve. Thus, the secret meeting that Aldrich had organized would have a great influence on the design of the Federal Reserve System.

Key Elements of the Federal Reserve Act

Despite the rejection of Aldrich’s proposal, not long after, on December 23, 1913, with Woodrow Wilson as President of the United States, the Federal Reserve Act was born.

In 1913, through the Federal Reserve Law, the structure and operation of the body that would act as the central bank of the United States was established. However, this law is open to amendments and modifications that have been implemented on several occasions.

By the Federal Reserve Act of 1913, 12 banks integrated into the Federal Reserve itself had the power to issue money and to act on inflation.

These 12 banks are located in various US cities such as New York, Boston, St. Louis, Cleveland, Richmond, Philadelphia, Atlanta, Kansas City, Minneapolis, Dallas, Chicago and San Francisco.

Each bank is headed by a governor and the Board of Governors is made up of the 12 governors. Each governor will have a mandate that will last 15 years. It is essential that the appointments of governors meet the criteria of representativeness of the US economy as a whole.

The different banks of the Federal Reserve not only have the capacity to print money, but they are also empowered to establish the interest rates on loans between financial institutions. Thanks to these powers over interest rates, the Federal Reserve has a large margin of action when it comes to providing liquidity to the US financial system. What’s more, the Federal Reserve can also grant loans to financial institutions.

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Thanks to its monetary policy instruments, the Federal Reserve cushions the lurching of the economy and helps the flow of credit to maintain economic activity. All this makes the Federal Reserve one of the most powerful economic institutions in the world.

amendments

Some of the most notable amendments are those of the 1930s and 1970s. While the creation of the Federal Open Market Committee was approved in the 1930s, the amendments of the 1970s directed the Federal Reserve’s objectives toward employment promotion, stable prices and moderate interest rates.

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