TOP DRAWER ARTICLE

A Brief History of the Federal Reserve System
by
HL Carpenter

Because of extensive media coverage of changing interest rates and fiscal policy, you probably know the Federal Reserve System (‘the Fed’) is tasked with controlling and regulating the US money supply.

But did you know that before America’s central bank was created there was little monetary regulation?

In the 1600’s, many colonies printed their own currency, which meant the money you held in your hand might be worth less elsewhere in the country. That uncertainty created illiquidity and an unstable economy.

In 1775, the Continental Congress decided a standardized set of currency was needed to finance the American Revolution, and the First Bank of the United States was established in 1791. The bank’s charter expired after twenty years.

Between 1811 and the early 1900’s, opposition prevented the formation of another central bank, so a myriad of banking systems came into vogue. None were successful. Bank failures and economic instability caused by the panic those failures raised led to The Federal Reserve Act, which created the Federal Reserve System in 1913.

The Act called for twelve private regional Federal Reserve banks headed by a seven member Federal Reserve Board. By 1914, the regional Federal Reserve banks were operational, monitored by the Federal Reserve Board. The Board had several functions, including carrying out monetary policy, overseeing the soundness of commercial banking institutions and acting as fiscal agent for the US government.

After the Great Depression, the Banking Act of 1933 authorized the Federal Open Market Committee (FOMC) and made this new part of the Fed responsible for regulating the money supply. The Act also strengthened the Federal Reserve Board and re-named it the Board of Governors. The FOMC is composed of Federal Reserve Bank presidents and members of the Fed’s Board of Governors.

Currently, the Fed is made up of three parts: The Board of Governors, twelve reserve banks, and the FOMC. The US Congress oversees the entire system, which is why the Chairman of the Board of Governors (presently Ben Bernanke) appears before our representatives to make those newsworthy bi-annual reports.

Originally published June 2008.

Last update: December 30, 2009