History of Central Banking in The United States - The Federal Reserve

The Federal Reserve

The Federal Reserve's power developed slowly in part due to an understanding at its creation that it was to function primarily as a reserve, a money-creator of last resort to prevent the downward spiral of withdrawal/withholding of funds which characterizes a monetary panic. At the outbreak of World War I, the Federal Reserve was better positioned than the Treasury to issue war bonds, and so became the primary retailer for war bonds under the direction of the Treasury. After the war, the Federal Reserve, led by Paul Warburg and New York Governor Bank President Benjamin Strong, convinced Congress to modify its powers, giving it the ability to both create money, as the 1913 Act intended, and destroy money, as a central bank could.

During the 1920s, the Federal Reserve experimented with a number of approaches, alternatively creating and then destroying money which, in the eyes of Milton Friedman, helped create the late-1920s stock market bubble.

After Franklin D. Roosevelt took office in 1933, the Federal Reserve was subordinated to the Executive Branch, where it remained until 1951, when the Federal Reserve and the Treasury department signed an accord granting the Federal Reserve full independence over monetary matters while leaving fiscal matters to the Treasury.

The Federal Reserve's monetary powers did not dramatically change for the rest of the 20th century, but in the 1970s it was specifically charged by Congress to effectively promote "the goals of maximum employment, stable prices, and moderate long-term interest rates" as well as given regulatory responsibility over many consumer credit protection laws.