After a century of political struggle over the government’s role in banking and currency, the Federal Reserve Act of 1913 settled the question by establishing a national network of banks in aid of the monetary system. Despite much acrimonious debate about the supply of money in the economy throughout the late 19th century, the Congress had not instituted any large-scale reforms to change the banking and financial structure of the nation since the time of the Civil War. The crisis over the supply of money and its relationship to the nation’s economic well-being was once again highlighted by the Panic of 1907. Banking reform became one of the major issues addressed by progressive reformers and politicians.
As one of the principal concerns of WooDROW Wilson during his first term as president, banking reform had strong support from both aisles of Congress. Unlike many other areas of reform that divided Democrats and Republicans, both parties favored the need for greater federal regulation of banking and the supply of currency as a key to preventing future economic panics or depressions. As national debate turned to restructuring and regulating banking, much concern was voiced about whether public or private concerns should have the leading influence in any new agencies created by federal legislation.
In 1913, Wilson assumed leadership over this issue and pushed through Congress the Federal Reserve Act, perhaps the most significant piece of legislation signed by Wilson during his first administration. The principal aim of this legislation was to control the supply of money in circulation by creating a federal agency charged with regulating interest rates. With its ability to determine the rate at which private banks could borrow money from the government, the Federal Reserve was able, by this legislation, to either expand or deflate the availability of money in the nation’s economy. To control this process, the Federal Reserve Act established 12 regional banks. All private banks in the United States were required under this legislation to deposit an average 6 percent of their assets in their regional Federal Reserve Bank. These deposited funds were then used to make loans to member banks and to issue paper currency, or Federal Reserve notes, that facilitated financial transactions. When market conditions shifted in one region, regional banks were empowered to raise or lower interest rates in order to provide a quick response to sudden changes in credit demand.
To respond to public pressure that banking reform reflect the needs and concerns of the public and not just that of private bankers, the Federal Reserve Act charged the president with appointing a Federal Reserve Board that was responsible to the public, not the banking industry. The board set policy and administered the activities of the 12 regional banks. Although the Federal Reserve Act stands as a major achievement of the Wilson administration, it reflected the philosophical shift in Wilson’s thinking from the time of the 1912 presidential campaign to the policy initiatives of his first administration. During the campaign, Wilson had pledged to use the federal government to break up the power held by large industries. Within the Federal Reserve System, he in effect consolidated bank power.
While the Federal Reserve Act did a great deal to strengthen the financial health of the American economy, it did precious little to break the concentration of banking that had emerged in the late 19th century. With the collapse of the U. S. (and world) economy in 1929, the Reserve fell under attack for failing to prevent the onset of economic crisis. In general, Wilson had crafted the Federal Reserve system in a way that worked with large banks, rather than attempting to break them up. Much of the thinking and impetus behind this legislation had been to create a mechanism that could stave off economic crisis. Although during the 1990s, the Federal Reserve skillfully oversaw the largest expansion of the American economy, in the 1920s it was not as successful. Accordingly, the legislation seemed more in line with the thinking of Theodore Roosevelt’s New Nationalism that Wilson had campaigned against in 1912.
Further reading: James Livingston, Origins of the Federal Reserve System: Money Class and Corporate Capitalism, 1890-1913 (Ithaca, N. Y.: Cornell University Press, 1986).
—David R. Smith
World History
