Federal Reserve Act

Definition

The Federal Reserve Act, enacted in 1913, established the Federal Reserve System as the central banking authority of the United States. This act aimed to create a safer and more flexible financial system by providing a means for banks to maintain reserve balances and regulating monetary policy through the control of interest rates and money supply.

5 Must Know Facts For Your Next Test

1. The Federal Reserve Act was a response to financial panics and the instability of the banking system in the early 1900s.
2. The act created twelve regional Federal Reserve Banks that serve as the operating arms of the Federal Reserve System.
3. One of the key functions established by the act is the ability to issue Federal Reserve Notes, which are the currency used in the U.S.
4. The Federal Reserve Board, appointed by the President, oversees the Federal Reserve System and implements monetary policy.
5. The Federal Reserve Act laid the groundwork for modern monetary policy tools, such as open market operations and discount rates.

Review Questions

• How did the Federal Reserve Act address issues related to banking stability during the Progressive Era?
  • The Federal Reserve Act addressed banking stability by creating a central banking system designed to manage financial panics and provide reliable access to credit. It established a network of regional banks that could support local banks during times of crisis. This helped stabilize the banking system by ensuring liquidity and confidence, which were critical during a time when bank failures were common.
• Analyze how the establishment of the Federal Reserve System changed monetary policy in the United States.
  • The establishment of the Federal Reserve System fundamentally transformed monetary policy by giving a centralized authority the ability to control money supply and influence interest rates. Before this act, monetary policy was largely uncoordinated and reactive to crises. With tools such as open market operations and setting discount rates, the Federal Reserve could proactively manage economic conditions, promoting stability and growth in both inflationary and deflationary environments.
• Evaluate the long-term implications of the Federal Reserve Act on economic reform movements in America.
  • The long-term implications of the Federal Reserve Act on economic reform movements include a significant shift toward a managed economy where monetary policy plays a crucial role in addressing economic challenges. This act legitimized federal intervention in economic affairs, which resonated with other Progressive reforms aimed at increasing government oversight and accountability. Over time, this has led to greater expectations for government involvement in managing economic crises, shaping debates about fiscal responsibility and regulatory practices that continue today.

Related terms

Monetary Policy: The process by which a central bank manages money supply and interest rates to influence economic activity.

Central Banking: A system in which a central bank manages a country's currency, money supply, and interest rates to ensure economic stability.

Banking Reform: Legislative measures aimed at improving the regulation and supervision of banks to promote stability and protect consumers.