THE FEDERAL RESERVE

By: Leo N. Marisol Z. and Jaqui O.

1775-1791: U.S. Currency

In order to fund war resources such as guns and food supplies, the Continental Congress decided to issue its first paper currency. The name of these paper currency was called continentals.The paper notes were produced in massive quantities that led to inflation, as the war the progressed the inflation grew more rapid. Finally people decided that the notes of money were really just useless pieces of paper. Sort of like the paper currency of Germany after World War I.

1791-1811: First Attempt at Central Banking

In 1791, with the urging of Alexander Hamilton, who was Treasury Secretary at the time had Congress establish the First Bank of the United States in Philadelphia. The First Bank ended up becoming the largest corporation in the country which dominated with big banking and money interests. Many American who depended on agriculture were uneasy with the idea of a large and powerful bank and opposed it. When the banks 20-year charter expired in 1811 Congress refused to renew it

1816-1836: A Second Try Fails

In 1816 some politicians once again wanted the idea of an established centralized banking system. Congress decided to charter a Second Bank for the United States. But then came in an opposing force known as Andrew Jackson who became President in 1828; who hated the idea of a centralized bank. His attack on the idea of centralized banking struck a popular nerve with Americans. When the Second Banks charter ended, Congress did not renew another one.

1836-1865: The Free Banking Era

Between 1836 and 1865 many banks, state chartered or not, became a problem around this time. Soon the banks issued their own notes redeemable in gold or specie. Banks began to offer demand deposits to increase commerce. The New York Clearing House Association was established in 1853 in order to control the rising of check transactions. This helped proved a way for the citys banks to exchange checks and settle accounts.

1863: National Banking Act

During the Civil War, the National Banking Act of 1863 was passed. The Act provided for nationally chartered banks, whose money notes needed to be backed by U.S. government securities. An amendment to the act required taxation on state bank notes but not national bank notes, effectively creating a uniform currency for the nation. Even though the taxation affected the state banks, they still manage to prosper due to the popular demand deposits that happened during the

1873-1907: Financial Panics Prevail

Even though the National Banking Act provided some measure of economic stability for the nation, the nation still had bank runs and financial panics which damaged the economy. In 1893, U.S. had a sudden banking panic the worst it had ever seen. Then came along J.P. Morgan aided in stabilizing the economy. Due to this panic, something had to be done with banking system, in order to prevent an event of this magnitude from coming again.

1907: A Very Bad Year

In 1907 another banking panic was triggered due to a failure that happened on Wall Street. J.P. Morgan was again called upon to avert disaster. By this time, most Americans were calling for reform of the banking system.But there was a problem during the reformed that made deep divisions among the citizens. Conservatives and powerful money trusts in the big eastern cities were vehemently opposed by progressives. But there was a growing consensus among all Americans that a central banking authority was needed to ensure a healthy banking system and provide for an elastic currency.

1908-1912: The Stage is Set for Decentralized Central Bank

The Aldrich-Vreeland Act of 1908, passed as an immediate response to the panic of 1907, provided for emergency currency issue during crises. It also established the national Monetary Commission to search for a long-term solution to the nations banking and financial problems. Under the leadership of Senator Nelson Aldrich, the commission developed a banker-controlled plan. William Jennings Bryan and other progressives fiercely attacked the plan; they wanted a central bank under public, not banker, control. The 1912 election of Democrat Woodrow Wilson killed the Republican Aldrich plan, but the stage was set for the emergence of a decentralized central bank.

 Woodrow Wilson as Financial Reformer

Woodrow Wilson didnt know much about banking and he asked for advice from Virginia Representative Carter Glass. Glass was soon to become the chairman of the House Committee on Banking and Finance. Throughout the year of 1912, Glass and Wilson worked on a central bank proposal, by December of the year 1912 the Federal Reserve Act came upon.

 The Federal Reserve System is Born

From December 1912 to December 1913, the Glass and Willis proposal changed completely.By December 23,1913, President Woodrow Wilson signed the Federal Reserve Act, so it can become a law. This balanced the competing interest of private banks.

Open for Business

Before the new back could begin their work, they had to build a working institution around the area for the new law. By November 16,1914, the 12 cities that were chosen as sites for regional Reserve Banks were open for business.

 Fed Policy During the War

World War I Started around 1914, the Banks in the U.S didnt change one bit. All thanks to the emergency currency issued under the Aldrich-Vreeland Act of 1908. The banks in the U.S helped other banks. The United States would trade goods to Europe because they needed help during the war. Until 1917, the U.S declared war on Germany and this became a big chaos.

 The Beginning of Open Market Operations

Benjamin Strong, which was head of the New York Fed from 1914 until he died in the year of 1928. He realized that gold no longer was important to control credit. In 1923 the government gave clear evidence that the market would be the perfect way to control credit in the banking system. During the 1920s, the Fed started using market operations as a tool. Strong showed the stature of the Fed by promoting them to other central banks, especially the Bank of England.

 The Market Crash and the Great Depression

During the 1920s Glass warned the stock market that this was only going to bring problems. In October 1929, his predictions came true because the stock market had crashed and the nation fell into the worst depression in history. From 1930 to 1933, almost 10,000 banks failed and by March 1933, President Franklin Delano Roosevelt declared a bank holiday. Many government officials looked for ways to make the nations economy better. A lot of people blamed the Fed for this crash.

 The Depression Aftermath

In the reaction to the Great Depression congress passed the banking Act of 1993. calling for the separation of commercial and investment banking and requiring use of government. They also established the Federal Deposit Insurance corporation. Also as part of the massive reforms taking place.

 More Changes to Come

The Banking Act of 1935 called for further changes in the Feds structure, including the creation of the Federal Open Market Committee (FOMC) as a separate legal entity, removal of the Treasury Secretary and the Comptroller of the Currency from the Feds governing board and establishment of the members terms at 14 years. Following World War II, the Employment Act added the goal of promising maximum employment to the list of the Feds responsibilities. In 1956 the Bank Holding Company Act named the Fed as the regulator of bank holding companies owning more than one bank, and in 1978 the Humphrey-Hawkins Act required the Fed chairman to report to Congress twice annually on monetary policy goals and objectives.

 The Treasury Accord

The Federal Reserve system agreed to have a low interest rate peg on government bonds in 1942 after the United states went to world War II.The reason why they did this was to have a cheaper debt finance for the war. To have the pegged rate, The Fed was forced to give up control of the size of the portfolio and the money stock. Problems came upon the Treasure and the Fed. The treasury wanted the central bank to maintain the peg after the start of the Korean war in 1950. President Harry Truman and Secretary of the Treasure John Snyder supported the low interest rate peg. A lot of people argued over this rate peg but they came into an agreement that was called the Treasury-Fed Accord.

Inflation and Deflation

In 1970 inflation went high as producers and consumers rose. Everything started to double up. Later on by 1979 when Paul Volcker was sworn in as Fed chairman.He said action needed to be taken to break inflations stranglehold on the U.S. economy. Though everything he was very successful to bring the double digit inflation under control.

Setting the Stage for Financial Modernization

The Monetary Control Act of 1980 required the Fed to price. The act marks started in the beginning of a period of modern banking. By the 1999 the Gramm-Leach-Bliley Act was passed in essence overturning the Glass Steagall Act of 1993 and allowing banks to offer a menu of financial services.

The Longest Economic Expansion

After Alan Greenspan took over as the Fed chairman the stock market crashed. For all of this he ordered that the Fed issue a one sentence statement before the start of trading on October 20.After 10 years the economic expansion of the 1990s came to a close in March 2001. Due to the bursting in the 1990s stock market the Fed lowered interest rates rapidly.The decade was marked by generally declining inflation and the longest peacetime expansion.

Discount Window Operation Changes

The Federal Reserve changed its discount window operation in 2003. Now the rates at the window are set above the prevailing Fed Funds rate and provide rationing of loans to banks.

Financial Crisis and Response

In the early 2000s, low mortgage rates and expanded. This credit made homeownership possible for more people. Housing boom got up from increased securitization of mortgages. Securitization of riskier mortgage expanded even including subprime mortgage.

September 11, 2001

On September 11, 2001 the Federal Reserve as a central bank was tested when terrorist attacked New York, Washington and Pennsylvania disrupted U.S. financial market. The Fed issued a short statement. After that the Fed lowered interest rates and load more that $45 billion.