The Federal Reserve Act of 1913

History of the Federal Reserve

In late nineteenth and early 20th centuries financial panics occurred commonly in the American banks. The relentless banking panic in 1907 encouraged the desire for reform. People required a central banking power to make sure the correct function of banks that was affected because of bank panics (Beckhart, 13-32). There was also a need to administer bank actions so that banks were not involved in illegal practices that might lead to bank failures.

The public also wanted a more flexible currency and a better payments system, which was to bring economic stability as well. The public apprehension that banks would not be able to honor the promise to trade in the notes, led to bank runs. Considering that some of the banks capability to pay was doubtful, a large number of people in a single day used to insist to have their banknotes replaced for gold or silver.

These bank runs created panic that often spread making basis of runs on other banks as well and general financial panic. The strongest and the old traditional bank could not exchange all of its notes at once. The Banks used to make loans of the money they used to collect and it was not possible for the banks to return the gold or silver back to the public as the money was in circulation.

Therefore when ever a bank run used to take place the bank had to close because it could not exchange the large number of notes presented in a single day. Because of the financial panics the banks were not issuing credits and the economic activities were affected. The people used to loose their jobs frequently. Because the banking system of America was not in a position to provide currency if and when it's requirement increased considerably in a short period of time, there was a need to have reforms in the banking system of USA. [Federal Reserve Bank of Dallas, Retrieved from the World Wide Web: http://www.dallas.org/htm/system/history.html]

After the election of a Democratic President, Woodrow Wilson in 1912, with Democratic majority Senate and House of Congress, a comprehensive banking reform was on its way. Mr. Woodrow Wilson and Carter Glass, Democratic Representative of Virginia and chairman of the House Banking Committee, were the powerful forces at the back of the Federal Reserve Act. Glass had a plan for the banking system and was discussing with Wilson before his formal inauguration. In 1912, Congress made a National Monetary Commission to study the nation's financial system to bring out the weaknesses.

The commission presented Congress with a monetary reform plan that suggested the organizing a reserve body, which would hold the reserves of commercial banks and could make short-term loans to banks to ensure credit availability. Congress responded by drafting the Federal Reserve Act, creating the Federal Reserve System. President Woodrow Wilson formally approved and signed the act into law on December 23, 1913. [New York Times, pp. 1-2, Dec. 24, 1913.]

President Wilson waited until the Organization ...