1913 Federal Reserve Act

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What was the '1913 Federal Reserve Act'

The 1913 Federal Reserve Act was a U.S. legislation that created the current Federal Reserve System. The Federal Reserve Act intended to establish a form of economic stability in the United States through the introduction of the Central Bank, which would be in charge of monetary policy. The Federal Reserve Act is perhaps one of the most influential laws concerning the U.S. financial system.

BREAKING DOWN '1913 Federal Reserve Act'

Prior to 1913, financial panics were common occurrences, as investors were unsure about the safety of their deposits. Private financiers such as J.P. Morgan, who bailed out the federal government in 1895, often provided lines of credit to provide stability in the financial sector.

History

The Federal Reserve Act, signed into law by President Woodrow Wilson, gave the 12 Federal Reserve banks the ability to print money in order to ensure economic stability. More specifically, the Federal Reserve System created the dual mandate to maximize employment and keep inflation low.

In addition to printing money, the Fed received the power to adjust the discount rate/the fed funds rate and buy and sell U.S. treasuries. The federal funds rate, or the interest rate at which depository institutions lend funds maintained at the Federal Reserve to one another overnight, has a major influence on the available credit and the interest rates in the United States, and is a measure to ensure the largest banking institutions do not find themselves short on liquidity.

As of 2016, central banks across the globe use a tool known as quantitative easing to expand private credit, lowering interest rates and leading to increased investment and commercial activity. Quantitative easing is mainly used to stimulate economies during recessions, when credit is scarce.

Through the monetary tools at its disposal, the Federal Reserve attempts to smooth the booms and busts of the economic cycle, or maintain adequate bases of money and credit for current production levels.

Federal Reserve Banks

The 12 Federal Reserve banks, each in charge of a regional district, are in Boston, New York, Philadelphia, Cleveland, Richmond, St. Louis, Atlanta, Chicago, Minneapolis, Kansas City, Dallas and San Francisco. A governor nominated by the President and approved by the U.S. Senate leads each regional bank; together they make up the Board of Governors. Terms are for a 15-years period, and appointments are staggered by two years to limit the power of the President. Also, law dictates that appointments be representative of all broad sectors of the U.S. economy.

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