HISTORY OF THE FEDERAL RESERVE

BY: Ivar Velasco, Victor Santiago & Nicholas Leonardo Vazquez

1775-1791 U.S. Currency

To finance the American Revolution, Continental Congress printed the first paper money. They were known as Continentals. Soon an increase in prices came and the value of money decreased. This kept accelerating as the war progressed. Eventually, people lost their faith in the notes and they were Not worth a Continental meaning utterly worthless.

1791-1811 First Attempt at Central Banking

Treasury secretary Alexander Hamilton established the First Bank of the United States. Established in Philadelphia, in 1791. It was the largest corporation in the country and was dominated by big banking and money interests. Many Americans didn't agree with the idea of a large and powerful bank. Congress refused to renew the 20 year

1816-1836 A Second Try Fails

By 1816, the political climate was voting towards the idea of another central bank. Congress agreed to charter the Second Bank of the United States. But when Andrew jackson was elected to be president, he tried to kill it. But again, when the Second Banks charter expired in 1836, it was not renewed.

1836-1865 The Free Banking Era

State-chartered banks and uncharted banks, or free banks, were the big things going on in this time period. The New York Clearing House Association was established around this time in 1853. It was made to provide a way for the citys banks to exchange checks and settle accounts.

1863 National Banking Act

During the Civil War, the National Banking Act was passed in 1863. it provided for nationally chartered banks, whose notes were backed by U.S. government securities. An amendment caused requirement taxation on state bank notes but not national bank notes. Even though the taxation on the notes was required, state banks continued to flourish due to the growing popularity of demand deposits.

1873-1907 Financial Panics Prevail

Even though the National Banking Act of 1863 established a measure of currency stability for the growing nation, bank runs and financial panics continued. In 1893, there was a banking panic and it was the worst depression the United States had seen. The Nations banking and Financial system was in need of serious attention.

1907 A Very Bad Year

In 1907, an outburst on Wall Street ended in failure, it triggered a severe banking panic. Americans were calling for reform of the banking system, but the structure of that reform was cause for deep division among the countrys citizens. Conservatives and powerful money trusts in the big eastern cities were denied by progressives. But americans thought that 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 Banking

The Aldrich-Vreeland Act of 1908, passed as an immediate response to the panic of 1907. it provided for emergency currency issue during the crisis. it also established the national Monetary Commission to search for a long term solution to banking and financial problems. Senator Nelson aldrich, came up with a plan for developing a banker controlled system. But william Jennings and other progressives wanted a central bank under public. So the 1912 election of Democrat Woodrow Wilson killed Aldrichs plan.

1913: The Federal Reserve System is Born

From December 1912 to December 1913, the Glass - Willis proposal was hotly debated, molded and reshaped. By December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise a decentralized central bank that balanced the competing interest of private banks and populist sentiment.

1914: Open for Business

The Reserve Bank Operating Committee, comprised of Treasury Secretary William McAdoo, Secretary of Agriculture David Houston, and Comptroller of the Currency John Skelton Williams, had the arduous task of building a working institution around the bare bones of the new law. By November 16, 1914, the 12 cities chosen as sites for regional Reserve Banks were open for business.

1914-1919: Fed Policy During the War

When World War I broke out in mid-1914, U.S. banks continued to operate normally, with the help of the emergency currency issued under the Aldrich-Vreeland Act of 1908. A high impact in the United States came from Reserve Banks ability to discount bankers acceptances. United States aided the flow of trade goods to Europe, indirectly helping to finance the war until 1917. 1917 the United States officially declared war on Germany and financing our own war effort became paramount.

1920s: The Beginning of Open Market Operations

Following World War I, Benjamin Strong, head of the New York Fed from 1914 to his death in 1928, recognized that gold no longer served as the the central factor in controlling credit.

1929-33: The Market Crash And The Great Depression

Warned by Virginia Representative Carter Glass that stock market speculation would lead to terrible outcome 1930-33: >10,000 banks failed 4/33: FDR declares national bank holiday to prevent run-ons in the bank. Stabilising the economic situation.

1933: The Depression Aftermath

1933: The Depression Aftermath

1933: The Depression Aftermath

congress passed the Banking Act of 1933, known as GlassSteagall Act. The Act also established the Federal Deposit insurance Corporation (FDIC). FDIC placed open market operations under the Fed and required bank holding companies to be examined by the Fed, a practice that was profound future complications, as holding companies became prevalent structure for over time. Roosevelt recalled all gold and silver certificates, ending the gold and any other metallic standard.

1935: More Things To Come

The Banking Act- called for further change in Feds structure

Creation of Federal Open Market Committee\ Removal of the Treasury Secretary and the Comptroller of the Currency from the Feds governing board made it a responsibility for Feds to maximize employment. Because they promised.

1951: The Treasury Accord

The Federal Reserve System was able to keep low interest rates on taxes relying on govt bonds in 1942. Fed had to give up power in money stock to maintain these rates. Focus is on the need to contain inflationary pressures in the economy caused by the intensification of the Korean war. Treasury and Fed came to agreement, Treasury-Fed Accord. It eliminated the Fed having to convert the debt of the Treasury at a fixed rate and was essential to the independence of banks

1970s-80s: Inflation and Deflation

Inflation
Producer, consumer, and oil prices rose Federal deficit doubled Deflation Paul Volcker sworn in as chairman of Fed through leadership the doubled deficit cleared.

1980: Setting the Stage for Financial Modernization

Monetary Control Act (1980)

required the Fed to sell its financial services competitively others\ marked the beginning of the modern banking industry reforms banks began to attract customers by giving interest-paying accounts

banks were able to include banking insurance and make investments

1990s: Longest Economic Expansion

Stock Market crashes on October 19, 1987

The Fed lowered interest rates rapidly The Federal Reserve, consistent with its responsibilities as the nations central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system. ten year expansion lead to longest peacetime for our economy

September 11, 2001

Terrorist attack on New York Short statement issued The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.

a couple of days after the Fed loaned over $45 billion to stabilize the U.S economy

January 2003 discount Window Operation Changes

In 2003, the Federal reserve changed its discount window operations as to have rates at the window set above the prevailing Fed Funds rate and provide rationing of loans to banks through interest rates.

2006 and Beyond: Financial Crisis and Response

In the early 2000s, low mortgage rates and expanded access to credit made homeownership possible for more people. Housing got boosted from increase in securitization of mortgages.

Securitization: process in which mortgages were bundled together into securities that were traded in financial markets.

Securitization expanded rapidly, including mortgages to borrowers with poor credit records.