What Is the 1913 Federal Reserve Act?

The 1913 Federal Reserve Act is 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 a central bank to oversee monetary policy.

Key Takeaways

  • The 1913 Federal Reserve Act created the Federal Reserve System, known simply as "The Fed".
  • It was implemented to establish economic stability in the U.S. by introducing a Central Bank to oversee monetary policy.
  • The Federal Reserve Act is one of the most influential laws shaping the U.S. financial system.
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1913 Federal Reserve Act

Understanding the 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.

The 1913 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.

The Federal Reserve Act is perhaps one of the most influential laws concerning the U.S. financial system.

The Fed System

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. The seven members of the Board of Governors are nominated by the president and approved by the U.S. Senate. Each governor serves a maximum of 14 years, 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.

Current Federal Reserve Board
Jerome H. Powell (Chair)
Richard H. Clarida (Vice Chair)
Randal K. Quarles (Vice Chair for Supervision)
Michelle W. Bowman
Lael Brainard
(Seat Currently Empty)
(Seat Currently Empty)

Source

Current Federal Reserve Bank Presidents
Name of President Bank Location-District
Eric S. Rosengren Boston-1
John C. Williams New York-2
Patrick T. Harker Philadelphia-3
Loretta J. Mester Cleveland-4
Thomas I. Barkin Richmond-5
Raphael W. Bostic Atlanta-6
Charles L. Evans Chicago-7
James Bullard St. Louis-8
Neel Kashkari Minneapolis-9
Esther L. George Kansas City-10
Robert S. Kaplan Dallas-11
Mary C. Daly San Francisco-12

Source

Fed Powers

In addition to printing money, the Fed received the power to adjust the discount rate and the Fed funds rate and to buy and sell U.S. Treasuries. The Federal Funds Rate—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.

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.

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, such as during and following the 2008 financial crisis