History of the Federal Reserve
July 12, 2011
The monetary system within the United States of America is a complex, intricate system. At the top and in control of this system is the Federal Reserve and its board of governors. The “Fed” has had an interesting history within our country since its creation in 1913. It is the central bank of the United States. It is the third such attempt, and the most successful central bank to be formed in America. The creation of the Fed was initially done to stave off financial panics, but the scope and purview of the Fed has grown over time through the enactment of many laws that give the Fed its power. The main ...view middle of the document...
C. A central bank is a bank for banks. The Fed does for banks what banks do for individuals and business firms; it holds their deposits or legal reserves, for safekeeping; it makes loans; and it creates its own credit in the form of created deposits, or additional legal reserves, or bank notes, called Federal Reserve notes. It lends to banks only if they appear strong enough to repay the loan. It also has the responsibility of promoting economic stability, insofar as that is possible, by controlling credit.
Initially, the Federal Reserve's chief responsibilities were to create enough credit to carry on the nation's part of World War I and to process Liberty Bond sales. The system's lower reserve requirements for deposits in member banks contributed also to a sharp credit expansion by 1920, accompanied by a doubling of the price level. In 1919, out of deference to the Treasury's needs, the Federal Reserve delayed too long in raising discount rates, a step needed to discourage commodity speculation. That was a major mistake. In 1922, the system's leaders became aware of the value of open-market buying operations to promote recovery, and open-market selling operations to choke off speculative booms. Benjamin Strong, head of the Bank of New York, the central banking system’s largest bank, worked in the 1920s with Montagu Norman, head of the Bank of England, to help bring other nations back to the gold standard. To assist them, he employed open-market buying operations and lowered discount rates so that Americans would not draw off their precious funds at the crucial moment of resumption. Nonetheless, plentiful U.S. funds and other reasons promoted stock market speculation in the United States. Strong's admirers felt he might have controlled the situation had he lived, but in February 1928 he fell sick and, on 16 October, died. As in 1919, the Federal Reserve did too little too late to stop the speculative boom that culminated in the October 1929 crash. In the years 1930–1932, more than five thousand banks failed; in 1933, four thousand more failed. Whether the Federal Reserve should have made credit easier than it did is still debatable. Businessmen were not in a borrowing mood, and banks gave loans close scrutiny. The bank disaster, with a $1 billion loss to depositors between 1931 and 1933, brought on congressional investigations and revelations, as well as demands for reforms and measures to promote recovery. Congress subsequently overhauled the Federal Reserve System.
During the Great Depression, World War II, and even afterward, the Federal Reserve, with Marriner Eccles as board chairman (1936–1948), kept interest rates low and encouraged member banks to buy government obligations. The new Keynesian economic philosophy (the theory by John Maynard Keynes, perhaps the most important figure in the history of economics, that active government intervention is the best way to assure economic growth and stability) stressed the importance of low...