Question

How did the current Federal Reserve System evolve? What aspects of the American experience with a central bank were important in shaping the current structure of the Fed?

Answer 1

ANSWER:

Around 1791 , that is 15 years after the independence of the united states congress created the bank of the united states and the primary function of the bank was to assist the government in the financial transactions and to help in designing the growing economy of the united states.

At different regions across the states , people had different views about the bank like for example the northern states viewed the bank contribution to the industrial development as good but didn't like the credit system used by the bank and similarly the southern states didn't like the bank but did support whenever the bank put the credit constraint to the non agricultural businesses and the western states didn't like the bank at all because they wanted credit at lower interest rates but didn't like the power of the bank in the credit market.

This continued for around 100 years and after that people in the west wanted a change in the monetary policy due to 1 to 2 percent of deflation every year upto late 1890 as this led towards creating an increase in the actual amount of debt and since the supply of money was linked to gold which was shrinking all the time, there was a silver movement that is coining of silver in addition to gold as a means to reverse the deflation.

At the start of 20th century with a lot of financial crisis being faced by the states, there grew a demand to change the system with the catalyst being the severe panic in 1907 , in which the economy had shrunked 2 times of the great recession ( 2007 - 09) and after a lot of discussions the fed reserve was formed in its initial days and these were the following points to be followed in that system:

1. board was to be accountable to public.

2. board members are appointed by the president and senate confirms it.

3. governors serve 14 year terms with renewal every 2 years.

Now in the modern federal reserve , the decentralized way of working helped in making independent decisions within the districts which did not help in implementing the policies and after the great depression of 1935 the power distribution within the banking system was modified as after that 7 out of 12 seats on the fomc were taken by board of governors and the rest by the reserve banks and this structure has not been unchanged till date.