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 System

    The Federal Reserve System is the central bank of the United ...
  2. Federal Reserve Bank Of Chicago

    The Federal Reserve Bank of Chicago is one of 12 regional reserve ...
  3. Federal Reserve Bank Of Minneapolis

    The Federal Reserve Bank of Minneapolis is one 12 reserve banks ...
  4. Reserve Requirements

    Reserve requirements refer to the amount of cash that banks must ...
  5. Federal Reserve System - FRS

    The Federal Reserve System, commonly known as the Fed, is the ...
  6. Free Reserves

    Free reserves are the reserves a bank holds in excess of required ...
Related Articles
  1. Investing

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

    The chairman of the Federal Reserve oversees the U.S. banking system.
  2. Personal Finance

    How the Federal Reserve Affects Your Mortgage

    The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.
  3. 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.
  4. Insights

    7 Misconceptions About The Federal Reserve

    There are many fallacies about the Fed. The following misconceptions are among the most popular.
  5. Insights

    Why Is The Federal Reserve Independent?

    An overview of the independent status of the Federal Reserve and arguments for and against it.
  6. Insights

    How Central Banks Control the Supply of Money

    A look at the ways central banks pump or drain money from the economy to keep it healthy.
  7. Insights

    The Federal Reserve System Affects You More Than You Might Think

    How does the Federal Reserve System affect ordinary citizens? In more ways than you might realize.
  8. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
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. What happens if the Federal Reserve lowers the reserve ratio?

    If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy, commercial banks are required ... Read Answer >>
  3. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
  4. How do central banks impact interest rates in the economy?

    Learn how central banks such as the Federal Reserve influence monetary policy in the economy by increasing or decreasing ... Read Answer >>
  5. What's the highest inflation rate in U.S. history?

    Learn about the periods with the highest inflation in U.S. history, and find out how U.S. Federal Reserve policy measures ... Read Answer >>
Trading Center