Question

The Federal Reserve was founded in 1913. Trace its development over the first two decades of its existence. How was it structured originally until changes were made by the Banking Act of 1935? What role did it play in the recession of 1929 to 1933?

Answer 1

The Continental Congress imprinted the first paper money of the new nation to fund the American Revolution. The fiat money notes, known as "continentals," were issued in such quantity that they contributed to inflation, which, though mild at first, escalated rapidly as the war progressed. Ultimately, citizens lost confidence in the notes, and the term "Not worth a continental" came to mean "completely worthless." At the insistence of then Treasury Secretary Alexander Hamilton, Congress founded the United States First Bank, headquartered in Philadelphia, in 1791. This became the country's biggest company and was owned by big bank and capital interests.

Many agrarian-minded Americans were uncomfortable in resisting the concept of a large and strong bank. When the twenty-year charter of the bank expired in 1811, Congress declined one vote to extend it. In 1816, the political atmosphere was once again geared towards the concept of a central bank; Congress voted to charter the United States 'Second Bank by a slim margin. Yet when a central bank adversary, Andrew Jackson, was elected president in 1828, he threatened to kill him. His assault on his banker-controlled authority had struck a common nerve with Americans, and it was not renewed when the charter of the Second Bank expired in 1836.

The position of the banks of the Federal Reserve was not decided by Congress, but by the Treasury Secretary, the Agriculture Secretary, and the Currency Controller serving as the Couimitee of the Reserve Bank Organization.
The Congress delegated to this Committee the power to name no less than eight or twelve reserve cities and to divide the continental United States into a corresponding number of reserve districts.

There are currently twenty-five branches and two organizations in addition to the twelve reserve banks. The Bank of Cleveland Federal Reserve has one branch in Cincinnati and one in Pittsburgh.
All National banks were expected to enter the scheme, subscribe to the reserve banks 'capital stock and invest their reserves in it. State banks were permitted to become members on similar terms, given that they meet certain capital structure criteria and the general nature of their company.

T At the beginning of the Depression, the decision-making process of the Federal Reserve was decentralized and sometimes unsuccessful. Every district had a governor who set policies for the district, although certain decisions included the approval of the Washington, DC Federal Reserve Board. The board lacked the power and instruments to operate on its own and failed to organize policies through districts. The governors and the board recognized the need for coordination; often corresponded on important issues; and developed processes and programs to institutionalize cooperation, such as the Committee on Open Market Investment

The Federal Reserve began increasing the monetary base in the spring of 1931, but the increase was not enough to counteract the deflationary impact of the banking crises. In the spring of 1932, after Congress granted the requisite authority to the Federal Reserve, the Federal Reserve vigorously increased the monetary base. The strategy initially appeared to be successful, but the Federal Reserve changed course after a few months. The economy was hit by a series of political and international shocks, and the contraction resumed. Overall, the Fed’s efforts to end the deflation and resuscitate the financial system, while well intentioned and based on the best available information, appear to have been too late