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Friday, December 19, 2014

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Intersections: Winter 2005

The Fed Celebrates 90th Anniversary

The Federal Reserve System was born when President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913. It took some months for the act to be implemented and for the Federal Reserve Board and the Reserve Banks that make up the System to open for business. The Federal Reserve Bank of Philadelphia opened on November 16, 1914, along with the 11 other Reserve Banks located in cities across the country. So over the past two years, the Federal Reserve System has marked two milestones: the System’s 90th anniversary in 2003 and the Federal Reserve Banks’ 90th in 2004.

The idea for the Federal Reserve System grew out of the need for a financial institution that could act as a lender of last resort during financial crises and could also smooth seasonal fluctuations in money and credit that previously caused sharp swings in interest rates. The act established a system of 12 regional Reserve Banks that operate cooperatively but independently under the oversight of the Board of Governors of the Federal Reserve System located in Washington, D.C. With Reserve Banks throughout the United States and a centralized board in Washington, the system incorporates both regional and national perspectives as well as private- and public-sector interests.

The Federal Reserve System represents the nation’s third central bank. Based on the vision of Alexander Hamilton, Congress created the first Bank of the United States, which had some of the features of a central bank, in 1791. This so-called First Bank, headquartered in Philadelphia, was a large institution that contributed to unifying the national economy during the country’s early years. The First Bank was a private institution with about 70 percent foreign ownership, which concerned many Americans. In 1811, the First Bank’s charter came up for renewal and was rejected by a single vote in Congress.

After the War of 1812, however, Congress established a second Bank of the United States in 1816 to help finance the nation’s war debts and restore financial stability to the economy. Like the First Bank, the Second Bank had some features of a central bank. However, the Second Bank was not without opponents — most notably, President Andrew Jackson, who distrusted banks in general and particularly disliked the idea of a national bank with broad powers. In 1832, President Jackson vetoed a bill seeking an early re-charter of the Second Bank. After the Second Bank’s 20-year charter expired in 1836, the United States was without a central bank until the founding of the Federal Reserve System more than 75 years later.

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