The Federal Reserve System is the central banking system of the United States. Under a presidentially appointed Board of Governors located in Washington D.C., there is a network of 12 Federal Reserve Banks and 25 branches. It was officially established under Woodrow Wilson and the Federal Reserve Act of 1913.
Early Beginnings of the Fed
This modern federal banking system traces its origins to the First National Bank that was established by Congress at the urging of Alexander Hamilton. Many agrarian minded Americans were unsettled by the idea of such a powerful and extensive banking system and Congress refused to renew it after its twenty-year charter expired in 1811. In response to inflation after the War of 1812, Congress decided to charter the Second National Bank of the United States. However, after the passionate objections of President Andrew Jackson that a central bank was a threat to the liberties of the American people, Congress once again refused to renew the bank’s charter. State chartered banks and unchartered “free banks” with no federal regulation carried America’s banking for the next quarter century. This system was characterized by inadequate bank capital, risky loans, and insufficient reserves against bank notes. Even after the National Banking Act of 1863 attempted to stabilize American banking by allowing for the creation of nationally chartered banks, giving them the sole power to issue bank notes, bank runs and financial panics ensued. After multiple depressions in the economy, Congress began to take action, setting the stage for the emergence of a decentralized central banking system. First, the Aldrich-Vreeland Act of 1908 established the National Monetary Commission to generate a long-term solution to the country’s serious banking and financial difficulties. This Commission created a plan that called for one central institution, called the National Reserve Association, under the control of a board of primarily bankers, with the power to issue currency and multiple branches across the nation. Receiving aggressive opposition, this plan was never passed but it did prepare the way for the passage of a banking and currency reform program where central banking was placed under public, rather than banker, control.
Creation of the Federal Reserve
President Woodrow Wilson solicited advice from Carter Glass and H. Parker Willis, who proposed what ultimately, would become the Federal Reserve Act, passed by Congress in 1913. The legislation called for the creation of a network of 12 regional reserve banks, headed by a seven-member Federal Reserve Board made up of officials appointed by the President. Each regional bank supervises the commercial banks in their areas and maintains a supply of U.S. currency and coin. After severe stock market speculation led to the stock market crash and subsequent depression in 1929, many people criticized the Fed for its unwillingness to inject more money into the economy. After nearly 10,000 banks failed between 1930 and 1933, Congress passed the Banking Act of 1933, also known as the Glass-Steagall Act, which called for the separation of commercial and investment banking, required the use of government securities as collateral for Federal Reserve notes, and created the Federal Deposit Insurance Corporation (FDIC). In the Banking Act of 1935, the Federal Open Market Committee (FOMC) was created as a separate legal entity. Having played a critical role in managing the financial crisis of 2008-2009, the Federal Reserve continues its mission to add stability to the commercial banking system and to monitor and influence the American economy.