The Federal Reserve System was created by Congress in 1913 through the
Federal Reserve Act. Signed into law by President Woodrow
Wilson on December 23, 1913, the Act was "to provide for the establishment
of Federal Reserve Banks, to furnish an elastic currency, to afford means
of rediscounting commercial paper, to establish a more effective
supervision of banking in the U.S., and for other purposes". As it
stood, the Federal Reserve Act created a decentralized central bank which
balanced the competing interests of private bankers and public citizens.
"To furnish an elastic currency" meant that one of the responsibilities
of the Fed would be to make sure that banks could keep up with
changes in the demand for currency.
"To afford means of rediscounting commercial paper" also referred to the
availability of currency, specifically the Reserve Banks' responsibility
to lend money to banking institutions if necessary. The last
responsibility that Congress felt the Federal Reserve Banks needed to be
charged with, in order to secure a stable future for the U.S. monetary
and financial systems, was the ability to regulate and supervise banking
The impetus for Congress to write the Federal Reserve Act was a series of banking panics in the U.S., panics that led to
numerous bank failures and business bankruptcies. In a particularly severe crisis in 1907, banks experienced
unexpected and widespread requests for withdrawals during a time of national financial panic. Many banks were not
able to cover those withdrawals, and they had no resources with which to back them up. That crisis in 1907 prompted
Congress to create the National Monetary Commission chaired by Senator Nelson W. Aldrich, which led to the passage of the
Federal Reserve Act in 1913.
Since 1913, Congress has passed a number of significant laws that have clarified the purpose of the Federal Reserve System, including:
- The Banking Act of 1935,
which established the Federal Deposit Insurance Corporation (FDIC) as a permanent government agency
and provided for permanent deposit insurance at a specified level. The FDIC regulates state banks that are not members of the
Federal Reserve System.
- The Employment Act of 1946, which described "maximum employment,
production, and purchasing power" as some of the nation's top economic goals. The Act focused on the use of discretionary fiscal
policy and established two advisory panels: the Council of Economic Advisers in the
White House and the Joint Economic Committee in Congress. These panels were tasked with
reviewing economic conditions and recommending economic policy improvements. They required the President to submit an annual report
on the economy (The Economic Report of the
President), and represented an effort to develop broad economic policies at the federal level.
- The Bank Holding Company Act of 1956, which was passed to
clarify the rules governing bank holding companies. The Act required Federal Reserve Board approval to establish a bank holding
company. In addition, the Act clarified: 1) the regulations surrounding the acquisition of banks; 2) the non-banking
activities in which bank holding companies could engage; and (3) the procedures required for approving such activities.
- The International Banking Act of 1978, which brought foreign
banks closer in line with the regulations governing U.S. banking institutions and required deposit insurance for foreign bank branches
engaged in taking retail deposits in the United States. The Act directed most regulatory responsibilities for foreign banking
institutions to the Office of the Comptroller of the Currency (OCC).
- The Full Employment and Balanced Growth Act of 1978, also
known as the Humphrey-Hawkins Act, which sets four objectives for federal monetary policy: full employment, production growth, and
price stability, as well as balanced budgets and trade import/export levels. The bill mandates a relationship between Presidential
economic policy and the Federal Reserve's monetary policy.
- The Depository Institution Deregulation and Monetary Control Act of 1980,
which deregulated deposit interest rates, raised the deposit insurance requirement to $100,000, and expanded access to the Federal
Reserve's Discount Window. The Act also extended reserve requirements to all U.S. banking institutions.
- The Financial
Institution Reform, Recovery, and Enforcement Act of 1989, which was enacted following the savings and loan institution crisis of the
1980s. This Act strengthened thrift institution and real estate appraisal regulations, allowed bank holding companies to acquire
thrift institutions, and established new capital reserve requirements. The Act abolished the Federal Savings & Loan Insurance
Corporation (FSLIC), giving its regulatory authority to the FDIC. The Act also abolished the Federal Home Loan Bank Board (FHLBB),
creating the Federal Housing Finance Agency (FHFA) and the Office of Thrift Supervision (OTS) to
- The Federal Deposit Insurance Corporation Improvement Act of 1991,
which strengthened the powers of the FDIC. This Act created additional supervisory and regulatory examination standards for banks
and expanded prohibitions against insider activities.
- The Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization
Act, which allowed national banks to underwrite municipal bonds, strengthened the Community Reinvestment Act, and eased restrictions on
the Federal Home Loan Bank System. The Act also restricted the disclosure of nonpublic
personal information by financial institutions and unified regulations for bank-affiliated insurance providers.
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Federal Reserve Bank History