1913 United States law creating the Federal Reserve System
The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States.
After Democrats won unified control of Congress and the presidency in the 1912 elections, President Wilson, Congressman Carter Glass, and Senator Robert Latham Owen crafted a central banking bill that occupied a middle ground between the Aldrich Plan, which called for private control of the central banking system, and progressives like William Jennings Bryan, who favored government control over the central banking system. Wilson made the bill a top priority of his New Freedom domestic agenda, and he helped ensure that it passed both houses of Congress without major amendments.
The Federal Reserve Act created the Federal Reserve System, consisting of twelve regional Federal Reserve Banks jointly responsible for managing the country's money supply, making loans and providing oversight to banks, and serving as a lender of last resort. To lead the Federal Reserve System, the act established the Federal Reserve Board of Governors, members of which are appointed by the president. The 1933 Banking Act amended the Federal Reserve Act to create the Federal Open Market Committee, which oversees the Federal Reserve's open market operations. A later amendment requires the Federal Reserve "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
Overview.
The Federal Reserve Act created a system of private and public entities. There were to be at least eight and no more than twelve private regional Federal Reserve banks. Twelve were established, and each had various branches, a board of directors, and district boundaries. The Federal Reserve Board, consisting of seven members, was created as the governing body of the Fed. Each member is appointed by the U.S. president and confirmed by the U.S. Senate. In 1935, the Board was renamed and restructured. Also created as part of the Federal Reserve System was a 12-member Federal Advisory Committee and a single new United States currency, the Federal Reserve Note. The Federal Reserve Act created a national currency and a monetary system that could respond effectively to the stresses in the banking system and create a stable financial system. The goal of the system was to ensure that there would always be a supply of money and credit in times of financial strain. With the goal of creating a national monetary system and financial stability, the Federal Reserve Act also provided many other functions and financial services for the economy, such as check clearing and collection for all members of the Federal Reserve.
With the passing of the Federal Reserve Act, Congress required that all nationally chartered banks become members of the Federal Reserve System. These banks were required to purchase specified non-transferable stock in their regional Federal Reserve banks, and to set aside a stipulated amount of non-interest bearing reserves with their respective reserve banks. Since 1980, all depository institutions have been required to set aside reserves with the Federal Reserve. Such institutions are entitled to certain Federal Reserve services. State chartered banks were given the option of becoming members of the Federal Reserve System and in the case of the exercise of such option were to be subject to supervision, in part, by the Federal Reserve System. Member banks became entitled to have access to discounted loans at the discount window in their respective reserve banks, to a 6% annual dividend in their Federal Reserve stock, and to other services.
Background.
Central banking has made various institutional appearances throughout the history of the United States. These institutions started with the First and Second banks of the United States, which were championed in large part by Alexander Hamilton.
First Bank of United States.
The American financial system was deeply fragmented after the American Revolutionary War. The government was burdened with large wartime debts, and the new republic needed a strong financial institution to give the country a resilient financial footing. Alexander Hamilton and Thomas Jefferson had opposing views regarding whether or not the US could benefit from a European-style national financial institution. Hamilton was in favor of building a strong centralized political and economic institution to solve the country's financial problem. He argued that a central bank could bring order to the US monetary system, manage the government's revenues and payments, and provide credit to both the public and private sectors. On the other hand, Jefferson was deeply suspicious of a central bank because, he argued, it would undermine democracy. Jefferson and Southern members of congress also believed that a strong central financial institution would serve commercial interests of the north at the expense of Southern-based agriculture interests whose credit was provided by local banks during the post-revolutionary war era.
The First Bank of the United States was established in 1791 chartered for a period of twenty years. The US government was the largest shareholder of the bank. Despite its shareholder status, the government was not permitted to participate in management of the bank. The bank accepted deposits, issued bank notes, and provided short-term loans to the government. It also functioned as a clearinghouse for government debt. The bank could also regulate state-chartered banks to prevent overproduction of banknotes. The bank was very successful in financing the government and stimulating the economy. In spite of its successes, hostility against the bank did not fade. Jeffersonians questioned the bank's constitutionality. In 1811, the first bank of the United States failed to be renewed by one vote in both the House and the Senate.
Second Bank of the United States.
After the War of 1812, economic instability necessitated the creation of a second national bank. Due to expanding money supply and lack of supervision, individual bank activity sparked high inflation. In 1816, a second national bank was created with a charter of twenty years. Three years later, during the panic of 1819 the second bank of the United States was blamed for overextending credit in a land boom, and would tighten up credit policies following the panic.
The Second bank was unpopular among the western and southern state-chartered banks, and constitutionality of a national bank was questioned. President Jackson would come into office, and wished to end the current central bank during his presidency. Under the premise that the bank favored a small economic and political elite at the expense of the public majority, the Second Bank became private after its charter expired in 1836, and would undergo liquidation in 1841.
For nearly 80 years, the U.S. was without a central bank after the charter for the Second Bank of the United States was allowed to expire. After various financial panics, particularly a severe one in 1907, some Americans became persuaded that the country needed some sort of banking and currency reform that would, when threatened by financial panics, provide a ready reserve of liquid assets, and furthermore allow for currency and credit to expand and contract seasonally within the U.S. economy.
Some of this was chronicled in the reports of the National Monetary Commission (1909–1912), which was created by the Aldrich–Vreeland Act in 1908. Included in a report of the Commission, submitted to Congress on January 9, 1912, were recommendations and draft legislation with 59 sections, for proposed changes in U.S. banking and currency laws. The proposed legislation was known as the Aldrich Plan, named after the chairman of the Commission, Republican Senator Nelson W. Aldrich of Rhode Island.
The Plan called for the establishment of a National Reserve Association with 15 regional district branches and 46 geographically dispersed directors primarily from the banking profession. The Reserve Association would make emergency loans to member banks, print money, and act as the fiscal agent for the U.S. government. State and nationally chartered banks would have the option of subscribing to specified stock in their local association branch. It is generally believed that the outline of the Plan had been formulated in a secret meeting on Jekyll Island in November 1910, which Aldrich and other well connected financiers attended.
Since the Aldrich Plan gave too little power to the government, there was strong opposition to it from rural and western states because of fears that it would become a tool of bankers, specifically the Money Trust of New York City. Indeed, from May 1912 through January 1913 the Pujo Committee, a subcommittee of the House Committee on Banking and Currency, held investigative hearings on the alleged Money Trust and its interlocking directorates. These hearings were chaired by Rep. Arsene Pujo, a Democratic representative from Louisiana.
In the election of 1912, the Democratic Party won control of the White House and both chambers of Congress. The party's platform stated strong opposition to the Aldrich Plan. The platform also called for a systematic revision of banking laws in ways that would provide relief from financial panics, unemployment and business depression, and would protect the public from the "domination by what is known as the Money Trust." The final plan, however, was quite similar to the Aldrich Plan, with a few revisions. Sen. Carter Glass made these revisions, although the main premise of the Aldrich Plan was in there. Changes in the Banking and Currency System of the United States]. House Report No. 69, 63rd Congress to accompany H.R. 7837, submitted to the full House by Carter Glass, from the House Committee on Banking and Currency, September 9, 1913. A discussion of the deficiencies of the then current banking system as well as those in the Aldrich Plan and quotations from the 1912 Democratic platform are laid out in this report, pages 3–11.
Legislative history.
Attempts to reform currency and banking had been made in the United States prior to the introduction of H.R. 7837. The first major form of this type of legislation came through with the First Bank of the United States in 1791. Championed by Alexander Hamilton, this established a central bank that included in a three-part expansion of federal fiscal and monetary power (including federal mint and excise taxes). Attempts were made to extend this bank's charter, but they would fail before the charters expiration in 1811. This led to the creation of the Second Bank of the United States. In 1816, the U.S. Congress chartered this Second bank for a twenty-year period to create irredeemable currency with which to pay for the costs of the War of 1812. The creation of congressionally authorized irredeemable currency by the Second Bank of the United States opened the door to the possibility of taxation by inflation. Congress did not want state-chartered banks as competition in the inflation of currency. The charter for the Second Bank would expire in 1836, leaving the U.S. without a central bank for nearly eighty years.
In the aftermath of the Panic of 1907, there was general agreement among leaders in both parties of the necessity to create some sort of central banking system to provide coordination during financial emergencies. Most leaders also sought currency reform, as they believed that the roughly $3.8 billion in coins and banknotes did not provide an adequate money supply during financial panics. Under conservative Republican Senator Nelson Aldrich's leadership, the National Monetary Commission had put forward a plan to establish a central banking system that would issue currency and provide oversight and loans to the nation's banks. However, many progressives distrusted the plan due to the degree of influence bankers would have over the central banking system. Relying heavily on the advice of Louis Brandeis, Wilson sought a middle ground between progressives such as William Jennings Bryan and conservative Republicans like Aldrich. He declared that the banking system must be "public not private, [and] must be vested in the government itself so that the banks must be the instruments, not the masters, of business."
Democratic Congressman Carter Glass and Senator Robert L. Owen crafted a compromise plan in which private banks would control twelve regional Federal Reserve Banks, but a controlling interest in the system was placed in a central board filled with presidential appointees. The system of twelve regional banks was designed with the goal of diminishing Wall Street's influence. Wilson convinced Bryan's supporters that the plan met their demands for an elastic currency because Federal Reserve notes would be obligations of the government. The bill passed the House in September 1913, but it faced stronger opposition