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Federal Reserve Act of 1913

The Federal Reserve Act of 1913 created the Federal Reserve Bank. This proved to be the Act of Congress that set up the Federal Reserve System. This system became the Central Bank organization for the United States. As part of the act, the Federal Reserve acquired the powers to issue the nation’s legal tender currency. President Woodrow Wilson actually signed this act, making it law in 1913.

The leadership of the country felt the need to create such a central bank for several reasons. The United States had operated without a central bank going back to the expiration of the Second Bank of the United States’ charter. This meant that for about eighty years, the country had existed without any form of central bank.

In time, a number of financial panics had ensued without any central bank to intervene in them. The one that really galvanized congressional and public opinion for having a central bank proved to be the serious financial panic of 1907. As a result of these factors, a number of Americans decided that the nation required serious currency and banking reforms that could handle such panics by offering an available liquid assets’ reserve. They also figured such an institution might be capable of managing a consistent expansion and contraction of credit and currency from time to time as appropriate.

The original Federal Reserve Act plan recommended an establishment of an unusual combined public and private entity system. They suggested that minimally eight and as many as twelve regional private Federal Reserve banks should be created. All of them were to have their own boards of directors, regional boundary lines, and branches. This new entity would be led by a Federal Reserve Board comprised of seven members and made up of public officials that the President appointed and the Senate would confirm. An advisory committee known as the Federal Advisory Committee would be created, along with a brand new U.S. currency that would alone be accepted nationally, the Federal Reserve Note. In the final version of the bill, twelve regional Federal Reserve Banks were actually created. The rest of the above provisions became law and subsequently a part of the newly created Federal Reserve System.

Another important decision that Congress settled on with the Federal Reserve Act revolved around the private banks throughout the U.S. Every nationally chartered bank had to join the Federal Reserve System as a part of this act. They were made to buy stock that could not be transferred in their own area’s Federal Reserve Bank. It furthermore required that a set dollar total of reserves that did not pay interest had to be deposited to their own regional Federal Reserve Bank. Banks that are only state chartered have the choice, but not the obligation, of joining this system and being regulated by the Fed.

Finally, the act allowed the member banks to receive loans at a discounted rate from the discount windows of their own regional Federal Reserve Bank. They were promised a six percent yearly dividend on their Federal Reserve stock and provided with additional services. The act also gave the Federal Reserve Banks the authority to assume the role of U.S. government fiscal agents.

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