Federal Reserve
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The Federal Reserve
What is the Federal Reserve?
The Federal Reserve is the central bank of the United States of America. Think of the Federal Reserve as the “bank for banks" [1] in this country. It is basically the central bank of the whole country, which privately-owned banks look to for depositing their money into accounts and other operations for storing and acquiring funds. Also, as a central bank it controls the money supply for the nation and regulates the banking policies of its smaller private member banks[2]. The main goal of the Federal Reserve is to maintain the US economy and to keep it relatively stable, even in times of crisis.
Who started the Federal Reserve, and when?
Third Version
The Federal Reserve as we know it today is actually the third version of a central bank in the United States. The first [3] and second [4] versions of a central bank happened in the first quarter of the history of the United States, though each lasted only twenty years. However, the years between the first and second central banks saw huge problems with inflation and deflation[5]-- both of which are troublesome to an economy.
Free-Banking Period
After the Second Bank of the United States closed in 1836, with much criticism by president Jackson at the time, the country did not immediately turn to a third charter for a central bank. Instead, measures were taken to try to eliminate banking fraud and establish controls on legal contracts involving money. During this time laws like the Michigan Act[6] were attempted in order to stabilize the economy, where states had more control over their banking rules to stimulate the economy. Also during this period inflation and deflation ran rampant, fluctuating wildly and with little to no regulation on a national level to help matters[7]. With the states' control of banking, the US economy experienced huge drops in the value of the money that an average person had to their name.
Federal Government Steps In
Around the time of the beginning of the Civil War (starting in 1863), the federal government decided to try to solve the problem of the wildly fluctuating economy and the growing instability of the nation's money. The federal government issued the National Banking Acts[8], which attempted to standardize the currency being used by people and add extra cost to using state-issued bank-notes. This helped to a small degree, and can be considered the first steps toward the government later establishing what we know as the Federal Reserve. Already embroiled in a war (the Civil War, 1861 - 1865), the United States economy was in dire need of stimulation. The National Banking Acts, along with the influx of "greenbacks" (the United States' first federally-back fiat currency), helped to fund the war effort as well as provide a temporary solution to the problem of private- and state-issued paper money abuses.
Economic Troubles Near the Turn of the Century
By the last couple decades of the 1800’s state-issued money was still going strong. As such, the inflation/deflation fluctuations continued. These fluctuations, the still (relatively) low regulation on banking, and other factors led to numerous economic disasters during the last quarter of the 19th century and going into the 20th century. Two historical examples of disaster were the depression of 1893[9] and the banking panic of 1907[10]. These panics led to the Aldrich-Vreeland Act of 1908 as a stop-gap to address the economic problem of chronic depression and instability in the national economy[11]. While successful as a stop-gap measure to prevent a toppling economy, the Aldrich-Vreeland Act was finite: Congress needed to enact a long-term solution before January of 1914, when the act would expire.
Many Years in the Making
By 1912, Congress and the federal government were already in the process of developing a plan to extend the provisions put into place by the Aldrich-Vreeland Act. While debate had been commonplace in the political and banking circles over this issue since 1908 (and earlier, depending on your historical source), by 1912 the debate had become a part of public discourse[12][13] (similar to debate over the Iraq War today). Amid fears that private interests or a "Money Trust" would take control of a central banking system, Congressman Arsene Pujo of Louisiana chaired a committee (known as the Pujo Committee) that investigated suspected monopolistic practices or ilicit trust activities in the banking arena[14]. Near the end of 1912, President Taft in one of his last speeches near the end of his presidency, stated that "[t]he most crying need this country has is a proper banking and currency system."[15] Taft goes on to call the currency system in 1912 "inadequate," and says that "every one who has studied the question admits it." The need for a solution to the national currency problem was one of the forefront issues at that time.
The Federal Reserve Act
The Federal Reserve Act spent most of 1913 being debated in Congress and in public[16] [17] [18] [19] [20] [21], and managed to barely get passed just before the beginning of 1914[22] [23] (the year the Aldrich-Vreeland Act would be running out). Essentially, the Federal Reserve came about as a result of more than 100 years of attempts by the United States government to maintain a strong, flexible, and stable economy. It was a process that began back in 1791 and has changed a number of times over the years. It’s a process that still continues today. It is a government agency that is both a part of our federal government and is simultaneously able to operate without being beholden to Congress or the standing presidency[24]. The US Federal Reserve system was set up this way specifically to disallow any group of people, whether a political party or a private trust, to gain control over the nation’s economy.
Management of the Fed
Management of the Federal Reserve is done through members of the Board of Governors, who are nominated by the President of the United States of America and confirmed through the United States Congress in order to get into the office. The term of a board member is fourteen years, and term appointments are staggered so that one term appointment is made every two years. The position of Federal Reserve Chairman is also appointed by the President and approved by Congress, and they serve a term of four years.[25]. This means that a new government-appointed board member is introduced to the seven-member board as another one's term is completed, keeping a constantly-changing list[26] of government-appointed members to the board.
Notes:
- ↑ Term from HowStuffWorks.com. The How Stuff Works website (howstuffworks.com) has many informative and interesting articles on our federal reserve system, money, and other unrelated topics.
- ↑ A Brief History of Central Banking in the United States by Edward Flaherty - a general description of central banking. The main essay can be found online
- ↑ First Bank of the United States (1791 - 1811)
- ↑ Second Bank of the United States (1816 - 1836)
- ↑ General inflation and deflation data can be calculated online at this website.
- ↑ The Michigan Act of 1837, an attempt at near-free banking
- ↑ Link - Economic instability between the time of the Second Bank of the US and the federalized National Banking Acts
- ↑ The National Banking Acts (1863 & 1864)
- ↑ Historical beginnings... the Federal Reserve (PDF) by Roger T. Johnson, pg 15: “Financial panics occurred with some frequency, and they often triggered an economic depression. In 1893 a massive depression rocked the American economy as it had never been rocked before. Even though prosperity returned before the end of the decade-- and largely for reasons which this nation could not control-- the 1893 depression left a legacy of economic uncertainty."
- ↑ The Panic of 1907 and Some of Its Lessons by Myron T Herrick - some issues leading to the panic of 1907
- ↑ (books.google.com) - The Federal Reserve System: A History by Donald R Wells (pg 21); the chapter of the book explains the Aldrich-Vreeland Act in moderate detail.
- ↑ minneapolisfed.com - a 1988 article on the attempt by one economics professor in 1912 to convince rural bankers to come together under a federal system to help repair the economy
- ↑ New York Times Archive September 8th, 1912: Putting The Farmer In Command Of Ready Money: "IT has long been conceded by bankers and financial students that the United States is far behind in the race for efficiency and adequacy in the methods of commercial banking. It is now being realized that the country has not even left the starting post in the race to afford credit facilities to the farmer." (download via PDF)
- ↑ New York Times Archive January 7th, 1913: Think Money Inquiry Forced Chase Sale; Pujo Committee Elated at Bank Passing from the Control of First National (download as a PDF) -- a NYT article on one of the many consequences of the Pujo Committee inquiring against private interests
- ↑ New York Times Archive December 7th, 1912: Taft Asks Congress To Aid His Policies; In Valedictory Message He Pleads for Currency, Army, Navy, and Court Reforms (download as a PDF)
- ↑ New York Times Archives July 9th, 1913: Glass Currency Bill; Ex-Assistant Secretary of the Treasury Andrew Sees Defects. (download as a PDF)
- ↑ New York Times Archive September 30th, 1913: The Currency Bill; Prof. Jenks Says It Is Still Short of His Ideal. (download as a PDF)
- ↑ New York Times Archive October 25th, 1913: Wilson Upholds Glass Money Bill; But Senators Think His Statement Offers a Loophole for His Accepting Vanderlip Plan. (download as a PDF)
- ↑ New York Times Archive October 26th, 1913: Ten Chief Acts Of Currency Legislation Analyzed; Roger W. Babson, from Detailed Review, Finds the Lessons of History to Show That Pending Owen-Glass Bill Will Be Ultimately Harmful if It Is an Inflation Measure. (download as a PDF)
- ↑ New York Times Archive November 11th, 1913: Wall St. Defended To Owen And Glass; Bankers and Sponsors Debate the Currency Bill at Economic Club Dinner. F.A. Vanderlip Attacks It. Says Legislation Can Wait and Urges President Not to Put Party Triumph Above Country's Needs. (download as a PDF)
- ↑ York Times Archive December 8th, 1913: Ideal Reserve Plan; Should Seek to Help Local Banks, Not to Make Money. (download as a PDF)
- ↑ New York Times Archive December 14, 1913: Root Sees Peril In Money Bill (download as a PDF) - From the end of the article: "After numerous conferences of an informal nature at to-night's session, a tentative agreement was reported to begin voting on the bill in its final form, next Thursday, Dec. 18."
- ↑ memory.loc.gov Today in History - despite conspiracy theory claims, Woodrow Wilson signed into law the beginnings of the Federal Reserve (the Owens-Glass Act) on December 23rd of 1913, which was after it had gone through Congress in open public debate
- ↑ USCode at law.cornell.edu - Title 12 of the US Code, Chapter 3, Subchapter II, section 248; this lays out the division of powers over the Federal Reserve system, none of which are foreign
- ↑ FederalReserve.gov - brief explanation of board appointments.
- ↑ FederalReserve.gov - a list of Federal Reserve board members going back to its inception in 1914