Enacted on December 23, 1913, the Federal Reserve Act reformed the U.S. banking system by creating a central bank with the ability to expand and contract the money supply. This became known as the Federal Reserve System.
The United States experienced the Panic of 1907 when the established banking system nearly failed because many bank patrons withdrew money due to a fear that the banks would become insolvent after a 50 percent freefall of the stock market. Following the Panic of 1907, the U.S. government passed the Aldrich-Vreeland Act and established the National Monetary Commission. Its main purpose was to study the banking systems of major European countries and develop ideas to improve the U.S. banking system.
The National Monetary Commission published several reports regarding the state of the U.S. banking system. In a speech by Edward B. Vreeland of New York given to the House of Representatives, Vreeland noted a lack of structure in the American banking system by stating that there was little to no federal regulation over the 25,000 to 26,000 banks throughout the United States. Without a strong federal presence, banks could operate independently of each other and make financial decisions that could be detrimental to their patrons. A two-fold solution proposed that the Federal Reserve System be established to create cohesion between the banks as well as to create a sense of confidence in the banking system for both patrons and bankers in an attempt to prevent future banking panics.
One of the overarching issues with the banking system was the lack of any elasticity in currency. Prior to the Panic of 1907 there was no regulation on the issuance of currency. In addition to inspiring the nation with confidence in its banking system, the Federal Reserve Act enabled the U.S. government to control the issuance of money based on gold, consumer demand, and the state of the economy.
Although there have been modifications to the Federal Reserve Act and system, it continues to govern the U.S. banking system.
See also: Bryan, William Jennings (1860–1925) ; National Monetary Commission ; Progressivism
Griffin, G. Edward. The Creature from Jekyll Island: A Second Look at the Federal Reserve. Westlake Village, CA: American Media, 1998.
Meltzer, Allan H. A History of the Federal Reserve, Volume 1: 1913–1951. Chicago: University of Chicago Press, 2003.