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What is the '1913 Federal Reserve Act'?

The 1913 Federal Reserve Act was U.S. legislation that created the current Federal Reserve System. The Federal Reserve Act was developed to establish economic stability in the United States through the introduction of the Central Bank, which would oversee 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'

The law sets out the purpose, structure, and function of the Federal Reserve System. Congress can amend the Federal Reserve Act and has done so several times. Before 1913, financial panics were common occurrences because investors were unsure of the safety of their bank 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 to ensure economic stability. 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, or 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 that 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, lower interest rates and increase 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 and 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 located 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-year period, and appointments are staggered by two years to limit the power of the President. In addition, the law dictates that appointments be representative of all broad sectors of the U.S. economy.

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