Loading the player...

What is the '1913 Federal Reserve Act'?

The 1913 Federal Reserve Act was U.S. legislation that created the current Federal Reserve System. Congress developed the Federal Reserve Act to establish economic stability in the United States by introducing the Central Bank to 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 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. Each governor serves a 15-year term, and each governor's appointment is 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.

RELATED TERMS
  1. Federal Reserve Bank Of Richmond

    The Federal Reserve bank of Richmond is responsible for the fifth ...
  2. Reserve Requirements

    Reserve requirements refer to the amount of cash that banks must ...
  3. Federal Discount Rate

    The federal discount rate allows the central bank to control ...
  4. Federal Funds

    Federal funds are excess reserves that commercial banks deposit ...
  5. Free Reserves

    Free reserves are the reserves a bank holds in excess of required ...
  6. Adjustment Credit

    Adjustment credit is a short-term loan, which a Federal Reserve ...
Related Articles
  1. Investing

    How the Federal Reserve Devises Monetary Policy

    Learn about the tools the Federal Reserve uses to influence interest rates and economic conditions. Find out the types of action a central bank may take.
  2. Investing

    What's the Salary of the Chairman of the Federal Reserve?

    The chairman of the Federal Reserve oversees the U.S. banking system.
  3. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  4. Trading

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
  5. Insights

    How the Federal Reserve Manages Money Supply

    The Federal Reserve was created to help reduce the injuries inflicted during the slumps and was given some powerful tools to affect the supply of money.
  6. Insights

    How Much Influence Does The Fed Have?

    Find out how current financial policies may affect your portfolio's future returns.
  7. Insights

    Understanding How the Federal Reserve Creates Money

    Read about how the Federal Reserve actually targets and creates new money in the economy, and find out why the savings and loans system magnifies this process.
RELATED FAQS
  1. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  2. Who determines interest rates?

    Learn who determines interest rates. In countries using a centralized banking model, interest rates are determined by the ... Read Answer >>
  3. What's the difference between the prime rate and the discount rate?

    Learn more about the prime rate and the discount rate and how the Federal Reserve uses these rates in the U.S. economy. Explore ... Read Answer >>
  4. How Central Banks Influence Money Supply

    Central banks use several different methods to increase (or decrease) the amount of money in the banking system. Learn more ... Read Answer >>
  5. Do interest rates increase during a recession?

    Learn why interest rates do not rise in a recession; in fact, the opposite happens. Identify the factors that reduce interest ... Read Answer >>
Trading Center