1913 Federal Reserve Act: Definition and Why It's Important

What Is the 1913 Federal Reserve Act?

The 1913 Federal Reserve Act is legislation in the United States that created the Federal Reserve System. Congress passed the Federal Reserve Act to establish economic stability in the U.S. by introducing a central bank to oversee monetary policy.

History of the 1913 Federal Reserve Act

The Federal Reserve is the culmination of several periods of economic tumult in American history. Earlier in its history, the United States formed centralized national banks, much to the consternation of its more rural citizens. The national banks were typically controlled by large eastern banking powers, making them untrustworthy to those outside the area. State-chartered or "free banks" took over, issuing their own currency backed by gold.

In 1863, the National Banking Act was passed, allowing for nationally chartered banks again, which offered a way of providing a standardized currency backed by United States securities. But unstable financial markets in 1893 and 1907 resulted in market crashes and depressions, alleviated only by private infusions from J.P. Morgan. Banking reform became a priority to reassure the populace of the safety of their money. In 1912, President Woodrow Wilson asked for a solution from the House Committee on Banking and Finance. A decentralized bank was the answer and was established in the 1913 Federal Reserve Act.

Understanding the 1913 Federal Reserve Act

The law sets out the purpose, structure, and function of the Federal Reserve System. Congress can amend the Federal Reserve Act and has done so several times.

Before 1913, financial panics were common occurrences because investors were unsure of the safety of their bank deposits. Private financiers such as J.P. Morgan, who bailed out the government in 1895, often provided lines of credit to provide stability in the financial sector. The 1913 Federal Reserve Act, signed into law by President Woodrow Wilson, gave the Fed the ability to print money and policy tools to ensure economic stability.

The Federal Reserve System created the dual mandate to maximize employment and keep prices stable.

The Fed System

The 12 Federal Reserve banks, each in charge of a regional district, are in Boston, New York, Philadelphia, Cleveland, Richmond, St. Louis, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco.

The seven members of the Board of Governors are nominated by the president and approved by the U.S. Senate. Each governor serves a maximum of 14 years, and each governor's appointment is staggered by two years to limit the power of the president. In addition, the law dictates that appointments be representative of all broad sectors of the U.S. economy.

Here is the current list of Federal Reserve Board members as of August 29, 2022.

Here is the current list of Federal Reserve Bank Presidents:

Fed Powers

In addition to printing money, the Fed received the power to adjust the discount rate and the Fed funds rate and to buy and sell U.S. Treasuries. The Federal Funds Rate—the interest rate at which depository institutions lend funds maintained at the Federal Reserve to one another overnight—has a major influence on the available credit and the interest rates in the United States and is a measure to ensure that the largest banking institutions do not find themselves short on liquidity.

Through the monetary tools at its disposal, the Federal Reserve attempts to smooth the booms and busts of the economic cycle and maintain adequate bases of money and credit for current production levels.

Central banks across the globe use a tool known as quantitative easing to expand private credit, lower interest rates, and increase investment and commercial activity. Quantitative easing is mainly used to stimulate economies during recessions when credit is scarce, such as during and following the 2008 financial crisis.