The Federal Reserve Act
The Federal Reserve is the Central Bank of the United States which was created by the Federal Reserve act in 1913. This Act of Congress established the Federal Reserve as the sole issuer of currency, Federal Reserve notes, which we commonly call the US dollar. The Federal Reserve was created to alleviate banking panics that had occurred throughout the history of the United States, with hopes to assure investors that their deposits were safe. Kevin Hassett from the American Enterprise Institute states, “For 94 years, the Fed has been the central bank of the United States. Its primary duties are conducting the nation’s monetary policy, supervising and regulating banks, and providing financial services and liquidity (that is, ready cash) to depository institutions and the federal government.”
The basis for the creation of the Federal Reserve includes four parts:. To create an elastic currency, concentrate reserves from banks, provide a clearing system that allows gains to be realize, and provide the government with banking operations. The Federal Reserve consists of 12 regional reserve banks, a Washington-based board of governors, and the Federal Open Market Committee. To understand the history of the Federal Reserve, we must first examine the banking system in the United States that preceded it.
The earliest attempts at banking
Shortly after declaring our independence, The Continental Congress created the first paper currency used by the United States, to fund the Revolutionary War. This currency was customarily referred to as “continentals”. Inflating during later years of the war, depreciation set in and they soon became worthless, creating the phrase “not worth a continental”. It was not until 1791 that Congress created The Bank of The United States, which was established in Philadelphia. As stated on The Minneapolis Federal Reserve website: The Bank can be largely judged a success both in paying off war debts and in its commercial operations, which were much larger than its public activities. However, from the beginning, there were those who argued that the Bank was unconstitutional. The Constitution granted power to tax and print money to Congress, not a private corporation, critics argued. Also, with the war debt largely taken care of, many no longer saw the need for a national bank. It was short lived however, as Congress denied its charter renewal in 1811, which was decided by one vote. War again broke out in 1812 which began to again create federal debt, so to fund that debt Congress again established a bank, the Second Bank of the United States. Much larger than its predecessor and functioning quite similarly to the First Bank, its affairs were carelessly handled and The Bank became insolvent within one and a half years. Although eventually saved from failure by a new Bank president appointed by Congress, President Andrew Jackson conclusively ended its operations by removing federal deposits, paralyzing the Bank until its charter finally expired. From 1937 to the beginning of the Civil War, state chartered banks ruled the banking world in the United States. This time period was often referred to as the “free banking era.” During this time there was no central bank and many private banks issued notes that could be redeemed for gold or coins. Although there were various regulations, anyone could start a bank as long as they deposited government bonds with state auditors. During this time a private institution, The Suffolk Bank of New England, took over the primary roles and responsibilities of a central bank such as clearing payments and exchanging currency notes, until 1853 when the New York Clearinghouse Association began to perform the same operations. The National Banking Act War again would be the basis for a push to create a national bank. With the onset of the Civil War and lessons learned from the Second bank, a national banking system was created by the National Banking Act of 1863. Banks had a choice between being state or nationally chartered, although national chartered banks were required to issue government-printed notes and back their own notes with U.S. government securities. Heavy taxation on state chartered notes
The Federal Reserve is the Central Bank of the United States which was created by the Federal Reserve act in 1913. This Act of Congress established the Federal Reserve as the sole issuer of currency, Federal Reserve notes, which we commonly call the US dollar. The Federal Reserve was created to alleviate banking panics that had occurred throughout the history of the United States, with hopes to assure investors that their deposits were safe. Kevin Hassett from the American Enterprise Institute states, “For 94 years, the Fed has been the central bank of the United States. Its primary duties are conducting the nation’s monetary policy, supervising and regulating banks, and providing financial services and liquidity (that is, ready cash) to depository institutions and the federal government.”
The basis for the creation of the Federal Reserve includes four parts:. To create an elastic currency, concentrate reserves from banks, provide a clearing system that allows gains to be realize, and provide the government with banking operations. The Federal Reserve consists of 12 regional reserve banks, a Washington-based board of governors, and the Federal Open Market Committee. To understand the history of the Federal Reserve, we must first examine the banking system in the United States that preceded it.
The earliest attempts at banking
Shortly after declaring our independence, The Continental Congress created the first paper currency used by the United States, to fund the Revolutionary War. This currency was customarily referred to as “continentals”. Inflating during later years of the war, depreciation set in and they soon became worthless, creating the phrase “not worth a continental”. It was not until 1791 that Congress created The Bank of The United States, which was established in Philadelphia. As stated on The Minneapolis Federal Reserve website: The Bank can be largely judged a success both in paying off war debts and in its commercial operations, which were much larger than its public activities. However, from the beginning, there were those who argued that the Bank was unconstitutional. The Constitution granted power to tax and print money to Congress, not a private corporation, critics argued. Also, with the war debt largely taken care of, many no longer saw the need for a national bank. It was short lived however, as Congress denied its charter renewal in 1811, which was decided by one vote. War again broke out in 1812 which began to again create federal debt, so to fund that debt Congress again established a bank, the Second Bank of the United States. Much larger than its predecessor and functioning quite similarly to the First Bank, its affairs were carelessly handled and The Bank became insolvent within one and a half years. Although eventually saved from failure by a new Bank president appointed by Congress, President Andrew Jackson conclusively ended its operations by removing federal deposits, paralyzing the Bank until its charter finally expired. From 1937 to the beginning of the Civil War, state chartered banks ruled the banking world in the United States. This time period was often referred to as the “free banking era.” During this time there was no central bank and many private banks issued notes that could be redeemed for gold or coins. Although there were various regulations, anyone could start a bank as long as they deposited government bonds with state auditors. During this time a private institution, The Suffolk Bank of New England, took over the primary roles and responsibilities of a central bank such as clearing payments and exchanging currency notes, until 1853 when the New York Clearinghouse Association began to perform the same operations. The National Banking Act War again would be the basis for a push to create a national bank. With the onset of the Civil War and lessons learned from the Second bank, a national banking system was created by the National Banking Act of 1863. Banks had a choice between being state or nationally chartered, although national chartered banks were required to issue government-printed notes and back their own notes with U.S. government securities. Heavy taxation on state chartered notes