Chapter 16, Problem 1LO

To determine

The historical context of the development of Federal Reserve System.

Explanation of Solution

Historical context of the development of the Federal Reserve System

1791-1811: Initial concept of Central Banking

The First Bank of the United States was established in 1791, headquartered in Philadelphia. This bank was the largest corporation in America then. However, agriculture minded people could not accept it and the contract was not renewed after 20 years.

1816-1836: Second attempt on Central Banking system

In 1816, the political power in the country supported central banking system however, was again discontinued after 20 years.

1836-1865: The Free Banking Era

The concept of ‘Free banks’ came into existence and issuance of own notes were redeemable in gold or spices started.

1863: National Banking Act

Due to the rising volume of transactions, the National Banking Act of 1863 was passed. The nationally chartered banks were backed government securities.

1873-1907: Financial Panics

Although the National Banking Act of 1863 was established, banking panic triggered among the common people and the worst depression hit the United States. It was felt that the nation’s banking and financial system required serious consideration.

1907: Wall Street collapses

In 1907, Wall Street ended in collapse, triggering a banking panic. People realized that Central banking authority was required to maintain a healthy banking system.

1908-1912: Emergence of Decentralised Central Bank

The Aldrich-Vreeland Act of 1908 came as a relief to the people after the panic of 1907. It formed the National Monetary Commission to look for a long-term answer to the nation’s banking and fiscal troubles.

1912: Woodrow Wilson as Financial Reformer

President Woodrow Wilson, (1912) supported the idea of the emergence of a decentralized central bank. He made a Committee on Banking and Finance which came up with central bank proposal which was later modified as the Federal Reserve Act.

1913: Birth of the Federal Reserve System

December 23, 1913, President Woodrow Wilson signed the Federal Reserve Act. The decentralized central banking system was formed that compromised the challenging interests of private banks and also the sentiments of the common people.

1914: Opens for Business

On November 16, 1914, the 12 cities were selected as the place for regional Reserve Banks, which was just before World War 1. The main Reserve Bank Operating Committee comprised of Treasury Secretary William McAdoo, Secretary of Agriculture David Houston, and Comptroller of the Currency John Skelton Williams.

Economics Concept Introduction

Introduction:

Federal Reserve System: The central Banking system of United States of America is known as the Federal Reserve System. It controls the monetary system and regulates the financial system of the USA. They supervise the safety and soundness of the entire banking system. It actively participates in framing the monetary policy of the country.