Federal Reserve Act

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The Federal Reserve Act^[1] is the act of Congress that created the Federal Reserve System, the central banking system of the United States of America, which was signed by President Woodrow Wilson on December 23, 1913. For some eighty years before that time the country had been operating without a central bank after the charter for the Second Bank of United States was allowed to lapse in 1832, renewal legislation having been vetoed by President Andrew Jackson. However, after various financial panics, particularly a severe one in 1907, there was a growing consensus that some sort of banking and currency reform was needed which could provide a ready reserve of liquid assets in case of financial panics and would also provide for a currency that could expand and contract as the seasonal U.S. economy dictated. Some of this was chronicled in the reports of the National Monetary Commission (1909-1912), which was created by the Aldrich-Vreeland Act in 1908.

Included in a report of the Commission, submitted to Congress on January 9, 1912, were recommendations and draft legislation with 59 sections, for proposed changes in U.S. banking and currency laws. The proposed legislation was known as the Aldrich Plan, named after the chairman of the Commission, Republican Senator Nelson W. Aldrich of Rhode Island. The Plan called for a system of fifteen regional central banks, known as National Reserve Associations, whose actions would be coordinated by a national board of commercial bankers. The Reserve associations would make emergency loans to member banks, create money to provide an elastic currency, and would act as fiscal agents for the U.S. government. State and nationally chartered banks would have the option of subscribing to specified stock in their regional reserve association.

Since the Aldrich Plan essentially gave full control of this system to private bankers, there was widespread opposition to it because of fears that it would become a tool of certain rich and powerful financiers in New York City, referred to as "the Money Trust." Indeed, from May of 1912 through January of 1913 investigative hearings on the alleged Money Trust and its interlocking directorates were held by a subcommittee of the House Committee on Banking and Currency chaired by Representative Arsene Pujo, a Democrat from Louisiana.

In the election of 1912, the populist leaning Democratic Party won control of the White House and both chambers of Congress and that year's party platform stated strong opposition "to the so called Aldrich bill for the establishment of a central bank." However, the platform also called for a systematic revision of banking laws in ways that would provide relief from financial panics, unemployment, and business depression and protect the public from the "domination by what is known as the Money Trust."

To that end, legislation was sponsored in 1913 by the two chairmen of House and Senate Banking and Currency committees, Representative Carter Glass, a Democrat from Virginia and Senator Robert Latham Owen, a Democrat from Oklahoma. According to the House committee report accompanying the Currency bill (H.R. 7837) or the Glass-Owen bill, as it was often called at the time, the legislation was drafted from ideas taken from various proposals, including the Aldrich bill. After months of debates, votes and amendments, the proposed legislation, with 30 sections, was enacted as the Federal Reserve Act. The House, on December 22, 1913, agreed to the conference report on the Federal Reserve Act by a vote of 298 yeas to 60 nays with 76 not voting. The Senate, on December 23, 1913, agreed to it by a vote of 43 yeas to 25 nays with 27 not voting. The record shows that there were no Democrats voting "nay" in the Senate and only two in the House. The record also shows that almost all of those not voting on the bill had previously declared their intentions and were paired with members of opposite intentions.

Sections of the Federal Reserve Act The plan adopted in the original Federal Reserve Act called for the creation of a System that contained both private and public entities. There were to be 8 to 12 private regional Federal reserve banks (12 were established) each with its own branches, board of directors and district boundaries (Sections 2, 3, and 4) and the System was to be headed by a seven member Federal Reserve Board made up of public officials appointed by the President (strengthened and renamed in 1935 as the Board of Governors of the Federal Reserve System with the Secretary of the Treasury and the Comptroller of the Currency dropped from the Board - Section 10). Also created as part of the Federal Reserve System was a 12 member Federal Advisory Committee (Section 12) and a single new United States currency, the Federal Reserve Note (Section 16).

Congress decided in the Federal Reserve Act that all nationally charted banks are required to become members of the Federal Reserve System. It requires them to purchase specified stock in their regional Federal reserve bank and to set aside a stipulated amount of non-interest bearing reserves with their respective reserve bank (since 1980 all depository institutions have been required to set aside reserves with the Federal Reserve and be entitled to certain Federal Reserve services - Sections 2 and 19). State chartered banks have the option of becoming members of the Federal Reserve System and to thus be supervised in part by the Federal Reserve (Section 9). Member banks are entitled to have access to discounted loans at the discount window in their respective reserve bank, to a 6% annual dividend in their Federal reserve stock and to other services (Sections 13 and 7). The Act also permits Federal Reserve Banks to act as fiscal agents for the United States government (Section 15).

In the 1930's the Federal Reserve Act was amended to create the Federal Open Market Committee (FOMC) consisting of the seven members of the Board of Governors of the Federal Reserve System and five representatives from the Federal reserve banks (Section 12B). The FOMC is required to meet at least four times a year (the practice is usually eight times) and is empowered to direct all open-market operations of the Federal reserve banks.

Controversy over the origin of the Federal Reserve Act and the nature of the Federal Reserve System has always been part of its history, such as whether Congress has the Constitutional power to delegate its power to coin money or even issue paper money, or whether the Federal Reserve is a tool of the rich and powerful, or whether the Federal Reserve's mistakes deepened the Depression of the 1930s, or whether Federal reserve banks are private or public entities. Despite the controversies, however, the Federal Reserve Act is now nearly 100 years old and it has been amended by nearly 200 subsequent acts of Congress. The Act remains as one of the principal banking laws of the United States.

[edit] Notes

^ Act of December 23, 1913, ch. 6, 38 Stat. 251, codified in part at Chapter 3 of title 12 of the United States Code, 12 U.S.C. § 221 et seq.

[edit] Bibliographic Sources

Changes in the Banking and Currency System of the United States. House Report No. 69, 63d Congress to accompany H.R. 7837, submitted to the full House by Mr. Glass, from the House Committee on Banking and Currency, September 9, 1913. A discussion of the deficiencies of the then current banking system as well as those in the Aldrich Plan and quotations from the 1912 Democrartic paltform are laid out in this report, pages 3-11.

Federal Reserve Act (Act of December 23, 1913, ch. 6, 38 Stat. 251, codified in part at Chapter 3 of title 12 of the United States Code, 12 U.S.C. § 221 et seq.).

History of Central Banking in the United States

McKinney, Richard J. The Federal Reserve System: Information Sources at the Nation's Central Bank. Vol. 22 Legal Reference Services Quarterly, pp. 29-44 (2003). Briefly explains the historical development of the sections of the Federal Reserve Act and other banking laws and regualtions.

Money Trust Investigation - Investigations of Financial and Monetary Conditions in the United States under House Resolutions Nos. 429 and 504 before a subcommittee of the House Committee on Banking and Currency. 27 Parts. U.S. Government Printing Office. 1913.

Report of the National Monetary Commission. January 9, 1912, letter from the Secretary of the Commission and a draft bill to incorporate the National Reserve Association of the United States, and for other purposes. Sen. Doc. No. 243. 62d Congress. U.S. Government Printing Office. 1912.