A New Federal Standard for Banking within the U.S.

A New Federal Standard for Banking within the U.S.

The 1913 Federal Reserve Act is a federal law that was passed by the U.S. Congress in 1913 for the purpose of establishing the Federal Reserve System. Congress passed the 1913 Federal Reserve Act with the goal of creating economic stability within the U.S. by way of introducing a federal central bank with the authority to oversee and regulate all monetary policy within the country. To this end, the 1913 Federal Reserve Act set forth the purpose, structure, and general functions of the Federal Reserve System. What’s more, Congress also retains the right and authority to amend the provisions of the Federal Reserve Act as needed, something they have done several times since 1913 to update the provisions of the law in accordance with growth the financial industries of not only America but the greater world at large.

Why was the 1913 Federal Reserve Act needed?

A primary reason for why the 1913 Federal Reserve Act was deemed necessary as was the level of uncertainty that surrounded the safety of many bank deposits prior to 1913. As there was no federal banking standard prior to the passing of the 1913 Federal Reserve Act of 1913, investors who placed their assets in banks had no formal way of guaranteeing the safety of said deposits. These concerns were perhaps best encapsulated by the Panic of 1907, a financial crisis in which the New York Stock Exchange fell nearly 50% from its peak the previous year within a three-week period. As a result, many American consumers withdrew their deposits from regional banks around the country, as widespread panic ensued. As such, the 1913 Federal Reserve Act was passed to prevent future economic crises such as the Panic of 1907 by authorizing the Federal Reserve to both print money and utilize policy tools geared towards ensuring economic stability.

What are the provisions of the 1913 Federal Reserve Act?

The 1913 Federal Reserve Act effectively established the Federal Reserve System as the central banking system and authority of the U.S., with the aim of providing “the nation with a safer, more flexible, and more stable monetary and financial system.” The Federal Reserve System “is structured as an independent federal agency that operates outside of the executive branch with oversight from Congress.” To this point, the Federal Reserve Act allowed for the establishment of at least eight but no more than twelve regional Federal Reserve Banks, as well as governing board, made up of seven members tasked with overseeing these regional banks. Moreover, the law also established the Federal Reserve Note as the national currency of the U.S. Additionally, each regional Federal Reserve bank is managed by a governor who is appointed by the U.S. President and then confirmed by the U.S. Senate. Subsequently, the 12 regional Federal Reserve Banks are located in the following cities:

What amendments have been made to the Federal Reserve Act since 1913?

The 1913 Federal Reserve Act has been amended many times since it was originally passed over one hundred years ago. The first of these amendments was the Banking Act of 1933, also known as the Glass-Steagall Act, though later amendments include the Bank Holding Company Act of 1956, the Gramm-Leach-Bliley Act of 1999, and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The various amendments established various new regulatory bodies in relation to finance, including the Federal Open Market Committee or FOMC for short. The FOMC oversees all U.S. open market operations, such as the buying and selling of U.S. Treasury securities, among other responsibilities. Furthermore, these amendments also required the Federal Reserve to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

The 1913 Federal Reserve Act is arguably the most wide-reaching and influential piece of financial regulatory legislation in the history of the U.S. The law completely redefined the banking industries of the country by creating a central banking authority that would be overseen by the federal government. Though the law has been amended several times to match the everchanging world of global finance, the twelve regional banks that were originally established by the law continue to operate to this day. While the Federal Reserve System, in general, has drawn considerable criticism in regards to its power and authority, the establishment of the Federal Reserve set the stage for the financial various industries and institutions that currently exist within the U.S. today.

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