Why was the FEDERAL RESERVE invented? What did we have before it?

Answer 1

There were lots of problems with the monetary system prior to 1900. But the notion of a central bank was really taken seriously following the Panic of 1907 (see http://en.wikipedia.org/wiki/Panic_of_1907 ).

So what did we have before it?

-There would be no national coordinated monetary policy. Each bank would expand or contract credit based on their immediate business needs, not the natons requirements.

- Smaller banks would be dependent on larger banks for credit extensions, currency, etc. History has shown that larger banks often consider smaller banks as competition and didn't care if they failed.

- Paper money was issued and valued haphazardly. Much paper money was issued by state banks which had different rules and whose value did not hold up the more distance you were from the issuing bank.

- The Federal Government would have to do it's banking in large private banks

- In international monetary matters, the nations largest private banks would represent America

- There would be no elasticity to the currency. You would see more cycles of inflation/deflation, and boom/bust as we saw in the 1800s

- Banks would return to being audited soully by themselves in their shareholders interest versus sharehold+depositor interest

- Clearing of checks would go back to private clearinghouses often run by large banks. Without an impartial clearinghouse, decisions in the process would sway toward the private interests that control it.

At the time, there was a lot of debate on whether it should be privately or publicly run. The Republicans favored a private ownership, the Dems favored public. The first "central bank" bill voted on was for the "National Reserve Association" in 1911. It was a Republican bill that would have had private banks join and work together as a private bank. This bill was defeated by a Democratic congress. A compromise bill was created that consisted of government agency called the "Board of Governors", and 12 branches dominated by private banks that served their districts. This bill called the "Federal Reserve Act" was passed in 1913.

Problems with this arrangement surfaced in the 1920s. The branches acted independently of each other and resented any oversight by the Board of Governors. Following the crash of 1929, there were allegations that the NY Branch actually helped fuel the wild stock speculation that led to the crash with a loose money policy. There was also no coordinated effort of the branches to address the crash (some felt money supply should be tightened to reflect the lower demand for it).

All this led to the most significant change in Fed Res history since it was founded. The Bank Act of 1935 gave complete power and oversight of the system to the Board of Governors. For the first time, there was one public body reponsible for national monetary policy.

Answer 2

The Fed is actually like a private corporation. Many people even have conspiracy theories about the Fed and how powerful it actually is- since monetary policy is the most influential tool for setting the direction of the economy.
It originally passed through Congress in 1913 after an Aldrich fella realized the US Monetary system wasn't as superior as Germany and Britain's was. Then came Volcker in 79.. whose legacy will be hard to outlive. Good luck Bernanke.

Answer 3

The Federal funds rate is the rate that they use when they lend money to non Fed banks. That rate is intrinsically tied to what you and i will pay (or earn) in loans and CD's.
The Fed rate is tied to the discount rate which is extremely volatile and changes daily. This is the rate bank charge each other to make loans etc...

It was basically created due to the wall street crash of 1929. Regulation was passed by government to ensure the effects of the economy would not directly impact the money in accounts people had deposited into banks.
That's my basic off-the-cuff definition. for more information go to www.federalreserve.gov

Answer 4

The film Fiat Empire explains this in detail.

http://video.google.com/videoplay?docid=5232639329002339531&q=fiat+empire&hl=en