Federal Reserve Act

Two days before Christmas in 1913, President Wilson signed the bill that established the Federal Reserve System. The system was composed of 12 Federal Reserve Banks, one in each of 12 separate districts, to protect the interests of different regions. Unlike the 20-year charter of the first and second Banks of the United States, the charter of the Federal Reserve was permanent.

The system was to be headed by a Federal Reserve Board composed of seven members, including the secretary of the treasury, the comptroller of the currency ex officio, and five appointees of the president. Each Federal Reserve Bank was to be run by a board of nine directors. The Federal Reserve Board was to appoint three of the directors representing the “public”; the member banks of the district were to elect the remaining six. Three of the six locally elected directors could be bankers; the remaining three were to represent business, industry, and agriculture. Thus, the banking community had a minority representation on the Reserve Bank directorates in each district.

The Federal Reserve Act made membership in the system compulsory for national banks. Upon compliance with certain requirements, state banks might also become members. To join the system, a commercial bank had to purchase shares of the capital stock of the district Federal Reserve Bank in the amount of 3 percent of its combined capital and surplus. Thus, the member banks nominally owned the Federal Reserve Banks, although the annual return they could receive on their stock was limited to a 6 percent cumulative dividend. A member bank also had to deposit with the district Federal Reserve Bank a large part of the cash it had previously held as reserves. After 1917, all legal reserves of member banks were to be in the form of deposits with the Federal Reserve Bank.100

It was hoped that if the Federal Reserve Act were carefully followed, monetary disturbances would become a thing of the past. As we will see in Part IV, however, despite the high hopes held for the Federal Reserve System, periods of inadequate leadership and lack of understanding at the “Fed” permitted catastrophic monetary disturbances, bank panics, and sharp business cycles. Indeed, the Great Depression—America’s darkest economic period—was partly a result of failure at the Fed.

SELECTED REFERENCES AND SUGGESTED READINGS

Historical Statistics. Washington, D. C.: Government Printing Office, 1960.

Historical Statistics. Washington, D. C.: Government Printing Office, 1975.

James, John A. “The Conundrum of the Low Issue of National Bank Notes.” The Journal of Political Economy 84, no. 2 (1976): 359-368.

_. Money and Capital Markets in Postbellum

America. Princeton, N. J.: Princeton University Press, 1978.

“Public Debt Management Policy and

Board of Governors of the Federal Reserve System (U. S.). Banking and Monetary Statistics. Washington, D. C.: Board of Governors of the Federal Reserve System, 1943.

Bodenhorn, Howard, and Hugh Rockoff. “Regional Interest Rates in Antebellum America.” In Strategic Factors in Nineteenth Century American Economic History: A Volume to Honor Robert W. Fogel, eds. Claudia Goldin and Hugh Rockoff, 159-187. A National Bureau of Economic Research Conference Report. Chicago: University of Chicago Press, 1992.

Bordo, Michael D. “The Classical Gold Standard: Some Lessons for Today.” Federal Reserve Bank of St. Louis Review 63 (1981): 1-17.

Bordo, Michael D. and Hugh Rockoff. “The Gold Standard as a ‘Good Housekeeping Seal of Approval’,” The Journal of Economic History 56 (June 1996): 389-428.

Cagan, Phillip, and Anna J. Schwartz. “The National Bank Note Puzzle Reinterpreted.” Journal of Money, Credit and Banking 23, no. 3, Part 1 (August

1991): 293-307.

Calomiris, Charles W., and Joseph R. Mason. “Resolving the Puzzle of the Under Issuance of National Bank Notes.” National Bureau of Economic Research, Inc., NBER Working Papers No. 10951, December 2004.

Davis, Lance E. “Capital Immobilities and Finance Capitalism: A Study of Economic Evolution in the United States.” Explorations in Entrepreneurial History 1, no. 1 (Fall 1963): 88-105.

DeLong, J. Bradford. “Did J. P. Morgan’s Men Add Value? A Historical Perspective on Financial Capitalism.” In Inside the Business Enterprise, ed. Peter Temin. Chicago: University of Chicago Press, 1991.

Dighe, Ranjit S. The Historian’s Wizard ofOz: Reading L. Frank Baum’s Classic as a Political and Monetary Allegory. Westport, Conn.: Praeger, 2002.

Friedman, Milton. “The Crime of 1873.” Journal of Political Economy 6 (1990): 1159-1194.

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. National Bureau of Economic Research. Princeton, N. J.: Princeton University Press, 1963.

Gorton, Gary. “Clearinghouses and the Origins of Central Banking in the U. S.” Journal of Economic History 45 (1985): 277-283.

Historical Statistics of the United States, 1789-1945. Washington, D. C.: Government Printing Office, 1947.

Nineteenth-Century American Economic Growth. Explorations in Economic History 21 (1984):

192-217.

Johnston, Louis D., and Samuel H. Williamson. “The Annual Real and Nominal GDP for the United States, 1789-2002.” Economic History Service, March 2003a. Http://www. measuringworth. org/ usgdp/.

______. “Source Note for US GDP, 1789-Present.”

Economic History Services, March 2003b. http:// Www. measuringworth. org/usgdp/.

Keynes, John Maynard. Economic Consequences of the Peace. New York: Harcourt, Brace, and Howe, 1920.

Kindahl, James K. “Economic Factors in Specie Resumption: The United States, 1865-1879.” In The Reinterpretation of American Economic History, eds. Robert W. Fogel and Stanley L. Engerman. New York: Harper & Row, 1971.

Moen, Jon and Ellis W. Tallman. “The Bank Panic of 1907: The Role of Trust Companies.” Journal ofEco-nomic History 52, no. 3 (September 1992): 611-630.

Neal, Larry. “Trust Companies and Financial Innovation, 1897-1914.” Business History Review 45, no. 1 (Spring 1971): 35-51.

Odell, Kerry A. and Marc D. Weidenmier. “Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907.” Journal of Economic History 64, no. 4 (December 2004): 1002-1027.

Officer, Lawrence H. “Exchange Rate between the United States Dollar and the British Pound, 17912000.” Economic History Services, 2001. http:// Www. measuringworth. org/exchangepound/.

______. “The Annual Real and Nominal GDP for the

United Kingdom, 1086-2000.” Economic History Services, June 2003. Http://www. measuringworth .org/ukgdp/.

Rockoff, Hugh. “The Wizard of Oz as a Monetary Allegory.” Journal of Political Economy 98 (1990): 739-760.

Seeger, Pete. American Favorite Ballads. New York: Oak, 1961.

Selgin, George A., and Lawrence H. White. “Monetary Reform and the Redemption of National Bank Notes, 1863-1913.” Business History Review 68 (1994): 205-243.

Sprague, O. M. W. History of Crises under the National Banking System. Washington, D. C.: Government Printing Office, 1910.

Sylla, Richard. “The United States, 1863-1913.” In Banking and Economic Development: Some Lessons of Economic History, ed. Rondo Cameron. New York: Oxford University Press, 1972.

Timberlake, Richard H. “Ideological Factors in Specie Resumption and Treasury Policy.” Journal of Economic History 24 (1964).

_. The Origins of Central Banking in the United

States. Cambridge, Mass.: Harvard University Press, 1978.

U. S. National Monetary Commission. Report of the National Monetary Commission. Washington, D. C.: Government Printing Office, 1912.

Wimmer, Larry T. “The Gold Crisis of 1869: Stabilizing or Destabilizing Speculation under Floating Exchange Rates?” Explorations in Economic History 12 (1975): 105-122.