The Federal Reserve System (also known as the Federal Reserve , and informally as the Fed ) is the central banking system of the United States. It was created in 1913 by the enactment of the Federal Reserve Act, largely as a response to a series of financial panics or bank runs, particularly a severe panic in 1907. Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved. Events such as the Great Depression were some of the major factors leading to changes in the system. Its duties today, according to official Federal Reserve documentation, fall into four general areas:
- Conducting the nation's monetary policy by influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
- Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system, and protect the credit rights of consumers
- Maintaining stability of the financial system and containing systemic risk that may arise in financial markets
- Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
Federal Reserve System is subject to the Administrative Procedure Act. It is not "owned" by anyone and is "not a private, profit-making institution". It describes itself as "an independent entity within the government, having both public purposes and private aspects". In particular, neither the Federal Reserve System nor its component banks are owned by the US Federal Government.
According to the Federal Reserve, there are presently five different parts of the Federal Reserve System:
- The presidentially appointed Board of Governors of the Federal Reserve System, a governmental agency in Washington, D.C.
- The Federal Open Market Committee (FOMC), which oversees Open Market Operations, the principal tool of national monetary policy.
- Twelve regional privately-owned Federal Reserve Banks located in major cities throughout the nation, which divide the nation into 12 districts, acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors.
- Numerous other private U.S. member banks , which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks.
- Various advisory councils .
The structure of the central banking system in the United States is unique compared to others' in the world, in that an entity outside of the central bank creates the currency. This other entity is the United States Department of the Treasury.
History
Central banking in the United States
Main article: History of central banking in the United StatesIn early 1781 the Articles of Confederation & Perpetual Union were ratified so that Congress had the power to emit bills of credit. It passed later that year an ordinance to incorporate a privately subscribed national bank following in the footsteps of the Bank of England. However, it was thwarted in fulfilling its intended role as a nationwide central bank due to objections of "alarming foreign influence and fictitious credit," favoritism to foreigners and unfair competition against less corrupt state banks issuing their own notes, such that Pennsylvania's legislature repealed its charter to operate within the Commonwealth in 1785.
Four years after the U.S. constitution was ratified, the government adopted another central bank, the First Bank of the United States, but it would ultimately be shut down by President Madison. The Second Bank of the United States, i.e. the second central bank, met a similar fate when its charter expired under President Jackson. Both banks were, again, based upon the Bank of England, but the increased Federal power, due to the constitution, gave them more control over currency. Political opposition to central banking was the primary reason for shutting down the banks, but there was also a considerable amount of corruption in the second central bank. Ultimately, the third national bank was established in 1913 and still exists to this day. The time line of central banking in the United States is as follows:
- 1791–1811
- 1811–1816
- 1816–1836
- 1837–1862
- 1846-1921
- 1863–1913
- 1913–Present
Creation of First and Second Central Bank
The first U.S. institution with central banking responsibilities was the First Bank of the United States, chartered by Congress and signed into law by President George Washington on February 25, 1791 at the urging of Alexander Hamilton. This was done despite strong opposition from Thomas Jefferson and James Madison, among numerous others. The charter was for twenty years and expired in 1811 under President James Madison.
In 1816, however, Madison revived it in the form of the Second Bank of the United States. Early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed on Jackson's policies. Interestingly, Jackson is the only President to completely pay off the national debt. The bank's charter was not renewed in 1836. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907, provided strong demand for the creation of a centralized banking system.
Creation of Third Central Bank
Main article: History of the Federal Reserve SystemThe main motivation for the third central banking system came from the Panic of 1907, which renewed demands for banking and currency reform. During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of financial panics. According to proponents of the Federal Reserve System and many economists, the previous national banking system had two main weaknesses: an "inelastic" currency, and a lack of liquidity. The following year Congress enacted the Aldrich-Vreeland Act, which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform. The American public believed that the Federal Reserve System would bring about financial stability, so that a panic like the one in 1907 could never happen again; but just 22 years later in 1929, the stock market crashed again, and the United States entered the worst depression in its history, the Great Depression. Some economists including Milton Friedman, Ben Bernanke, Robert Latham Owen and Murray Rothbard believe that the Federal Reserve System helped to cause the Great Depression.
Federal Reserve Act
Main article: Federal Reserve ActThe chief of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions—one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central-banking systems and report on them. Aldrich went to Europe opposed to centralized banking, but after viewing Germany's monetary system he came away believing that a centralized bank was better than the government-issued bond system that he had previously supported.
Centralized banking was met with much opposition from politicians, who were suspicious of a central bank and who charged that Aldrich was biased due to his close ties to wealthy bankers such as J.P. Morgan and his daughter's marriage to John D. Rockefeller, Jr. Aldrich fought for a private bank with little government influence, but conceded that the government should be represented on the Board of Directors. Most Republicans favored the Aldrich Plan, but it lacked enough support in the bipartisan Congress to pass because rural and western states viewed it as favoring the "eastern establishment". Progressive Democrats instead favored a reserve system owned and operated by the government and out of control of the "money trust," ending Wall Street's control of the American currency supply. Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control. The Federal Reserve Act passed Congress in late 1913 on a mostly partisan basis, with most all Democrats in support and most Republicans against it. The plan that was adopted as the Federal Reserve Act had similarities to the Aldrich plan, but the balance of public and private control was modified.
1944-1971: Bretton Woods Era
Main article: Bretton Woods systemIn July 1944, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, to build a new international monetary system, which was in serious thre
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