How did the Federal Reserve started?

Question

What year did it start?
Who started it?
The background...?

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 exactly was the reasoning? Here is what it was like:

-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 soley by themselves in their shareholders interest (versus stockholder+depositer).

- 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.


There was a lot of debate on whether it should be privately or publicly run. The Replublicans 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 together for the common good. It 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 (then called the Board of Directors). 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.

Educational Reference Links:

The Federal Reserve - Board of Governors site - http://www.federalreserve.gov/

A Federal Reserve site for educators - http://www.federalreserveeducation.org

Federal Reserve publications - http://www.federalreserve.gov/publications.htm

Wikipedia - http://en.wikipedia.org/wiki/Federal_Reserve

Map of the branch locations - http://www.federalreserveonline.org/

FAQs - http://www.federalreserve.gov/faq.htm

Index to Federal Reserve sources - http://www.federalreserve.gov/general.htm

Answer 2

see this link: http://en.wikipedia.org/wiki/Federal_Reserve