the Federal Reserve
Before the Federal Reserve was created, the United States was vulnerable to a series of financial panics and bank runs that left many banks struggling to survive. The lack of a lender of last resort made it harder for people to invest in businesses and stunted economic growth. Congress created the Federal Reserve to address these problems by establishing a central bank that would act as a lender of last resort and perform other important functions. President Woodrow Wilson signed into law the Federal Reserve Act in 1913, creating a system of twelve public-private regional Federal Reserve Banks. The Federal Reserve continues to serve the nation’s economy by promoting a sound banking system, steady financial conditions and a healthy economy.
The Federal Reserve was born out of a struggle between competing interests in Congress. The country was in the midst of a severe financial crisis that resulted from a combination of political and economic factors. The Panic of 1907 was a particularly severe episode that spurred bank runs and wreaked havoc on the fragile banking system. The crisis left many Americans with little money and led to the creation of the Federal Reserve to deal with these banking panics and other financial crises.
At the time, most of America’s top financiers supported a central bank, but they were divided on how to shape it. Many favored a model similar to the Bank of England, but others were concerned that such a bank would concentrate too much power in the hands of a few men. Ultimately, a large group of banking and government leaders traveled to Europe to see how other countries managed their central banks. The National Monetary Commission, headed by Senator Nelson Aldrich, reported in 1911 that the country’s monetary system and laws needed to be changed.
Who Created the Federal Reserve?
The framers of the Federal Reserve Act decided to take a middle-of-the-road approach, rejecting a single central bank in favor of a system of regional Federal Reserve Banks. The Commission recommended that these regional banks hold a portion of their members’ reserves, issue currency against commercial assets and gold and perform other central banking functions. The plan, which the Framers adopted, was largely the product of work by Virginia Representative Carter Glass and his expert advisor, H. Parker Willis, who worked on the issue throughout most of 1912.
Glass’s bill was widely praised by his colleagues, but opponents raised concerns about the legislation, including its centralized control. In the end, Wilson inserted a provision into the Federal Reserve Act that established a central board to exercise supervision and coordination authority over the Federal Reserve Banks. This Board was composed of presidential appointees, either ex officio as cabinet officials or appointed for specific terms, and a small number of representatives elected by the Federal Reserve banks.
Although the Fed has grown to encompass numerous duties, it began with three key objectives: maximizing employment, stabilizing prices and moderating long-term interest rates. Today, the Fed has additional responsibilities that include overseeing and regulating banks, preserving the stability of financial markets, providing financial services to depository institutions and the U.S. government, and conducting research on the economy. The Fed’s immense powers have sparked controversy over the years, and it has been accused of encouraging inflation and asset bubbles and of favoring the interests of Wall Street over workers.