Federal Reserve Act

Definition

The Federal Reserve Act is a landmark piece of legislation passed in 1913 that established the Federal Reserve System, which serves as the central banking system of the United States. This act was a response to the financial panics of the early 20th century and aimed to create a more stable and secure financial system through centralized control over monetary policy. By regulating the supply of money and providing a mechanism for banks to lend to one another, it was intended to prevent bank runs and ensure economic stability.

5 Must Know Facts For Your Next Test

1. The Federal Reserve Act created a decentralized central banking system with both public and private components, allowing for regional Federal Reserve Banks to operate under a federal framework.
2. One major purpose of the Federal Reserve Act was to reduce the frequency and severity of banking panics by providing a mechanism for banks to borrow from the Federal Reserve during times of need.
3. The act established the Federal Open Market Committee (FOMC), which plays a crucial role in setting monetary policy and influencing interest rates.
4. Initially, the Federal Reserve's authority was limited, but over time it gained more powers, including control over interest rates and regulation of commercial banks.
5. The establishment of the Federal Reserve marked a significant shift in government intervention in the economy, reflecting Progressive ideals about regulation and reform.

Review Questions

• How did the Federal Reserve Act address the issues that led to financial panics in the early 20th century?
  • The Federal Reserve Act was designed to tackle the root causes of financial panics by creating a centralized banking system that could provide liquidity to banks during times of crisis. By allowing banks to borrow from the Federal Reserve, it aimed to prevent bank runs and restore public confidence in the banking system. This proactive approach helped stabilize the economy and provided a safety net for banks that were struggling.
• Evaluate the impact of the Federal Reserve Act on American economic policy in the years following its passage.
  • The passage of the Federal Reserve Act significantly transformed American economic policy by establishing a central authority that could influence monetary policy through interest rate adjustments and money supply control. This shift allowed for more responsive economic management, particularly during times of economic distress. Over time, the Federal Reserve became a key player in addressing economic challenges such as inflation and unemployment, which solidified its role as an essential institution in U.S. economic governance.
• Analyze how the establishment of the Federal Reserve reflects Progressive Era beliefs about government intervention in the economy.
  • The establishment of the Federal Reserve is indicative of Progressive Era beliefs that advocated for increased government intervention to solve social and economic problems. Progressives believed that unregulated capitalism led to instability and inequities, and thus they supported reforms that would create a fairer financial system. The Federal Reserve's creation not only represented a response to banking crises but also embodied a broader movement toward regulating industries and ensuring economic stability through government oversight.

Related terms

Monetary Policy:

The process by which a central bank, like the Federal Reserve, manages the supply of money and interest rates to influence economic activity.

Banking Crisis: A situation in which banks experience sudden withdrawals of deposits, leading to financial instability and potential failure of banks.

Federal Reserve System:

The central banking system of the United States, consisting of twelve regional Federal Reserve Banks and governed by the Federal Reserve Board, responsible for implementing monetary policy.