1. The Federal Reserve System is the United States’ version of a central bank. Central banks, also known as reserve banks, are the entities responsible for the monetary policy of a country. The United States has not always had a central banking system. In fact, three separate central banks have operated in the United States at one time or another since 1791.
2. Secretary of the Treasury Alexander Hamilton was a proponent of a strong central government with a central bank. Hamilton dueled with James Madison and Thomas Jefferson, who both argued that the new Constitution did not explicitly allow the federal government to form a bank. However, despite their best efforts neither Madison or Jefferson were able to prevent Hamilton from founding the First Bank of the United States in 1791. Hamilton wasn’t as successful in his famous duel with Aaron Burr on July 11, 1804; he died from the resulting gunshot wound a day later.
3. As president, Madison finally got his way when let the original 20-year charter for the First Bank of the United States expire in 1811. Surprisingly, Madison had a change of heart four years later, and asked Congress for a new central bank. In 1816, The Second Bank of the United States was granted a 20-year charter to provide the government two services: 1) establish a national currency, and 2) meet interest and principal payments on the National Debt run up during the War of 1812.
4. In 1832 Andrew Jackson campaigned on a platform opposed to charter renewal for the Second Bank of the United States. With the National Debt on target for being paid off by 1835, Jackson saw little reason for a central bank. After Jackson was reelected, the Bank’s president, Nicholas Biddle, unsuccessfully tried to pressure Jackson to renew the bank’s charter by contracting the money supply, but it was to no avail. In 1835 Jackson officially retired the National Debt. He retired the central bank one year later.
5. The period from 1837 to 1862 is known as the Free Banking Era because the US had no formal central bank. Instead, state authorities directed the printing and registering of bank notes and issued them to banks in amounts equal to deposited designated securities. In 1863, a system of national banks was instituted by the National Banking Act. Despite its passage, a series of bank panics in 1873, 1893, and 1907 could not be avoided.
6. The third and current central banking system of the United States, better known as the Federal Reserve System, was born in 1913 when, after many painful months of hearings, debates, and amendments, the Federal Reserve Act was passed by Congress. On a Sunday. Two days before Christmas. When most of Congress was on vacation. For the record, Democrats supported the bill while Republicans were against it.
7. Interestingly enough, nowhere in the title or anywhere else in the Federal Reserve Act were the words “central bank.” According to the Concise Encyclopedia of Economics: The primary reason for this omission was the term’s unpopularity with the populist wing of the Democratic Party. Republicans had accepted the label, but, after 1912, no longer controlled either Congress or the White House. That term, many congressmen objected, implied monopolistic control by Wall Street bankers, who would keep interest rates high and conspire with speculators to cause panics.
8. The main motivation for the third central banking system came from the Panic of 1907, which renewed demands for banking and currency reform. A majority of the American public believed that the Federal Reserve System would bring about financial stability, so that a panic like the one in 1907 could never happen again.
9. Don’t tell that to Ron Paul: Paul believes that the Fed’s ability to print money without any controls is actually the main cause of inflation and the economic bubbles that occasionally plague the country. Paul advocates reduced government spending, lower taxes, and letting the free market manage monetary policy as the proper alternative to the Fed.
10. Ironically, the presence of the Fed could not keep the United States from entering the Great Depression of the 1930s. Many prominent economists including the late Milton Friedman believe that the Fed was directly responsible for causing the Great Depression because they willingly allowed the money supply to slowly decline after the 1929 stock market crash, thereby preventing recovery and economic expansion.
11. The current Federal Reserve System is a quasi-private institution. That is, it is an independent government institution that has private aspects. The System is not a private organization and does not operate for the purpose of making a profit. It is owned by the 12 regional Federal Reserve banks, which are each in turn owned by a combination of regional and commercial banks.
12. In addition to maintaining the stability of the financial system and containing systemic risk that may arise in financial markets, the Federal Reserve Banks have several other functions including clearing checks, providing economic education, establishing economic policy, approving bank mergers and acquisitions, and researching and issuing reports on the regional economy which they publish eight times a year in a report known as “the Beige Book.”
13. The Beige Book, so-named because the cover of the Fed’s internal hard copies are, well, beige, is based upon reports from regional Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The report’s more formal name is the Summary of Commentary on Current Economic Conditions.
14. Back in 1970, when it began as an internal report for people at the Fed, the report actually had a red cover and was known as (you guessed it) the “red book.” But the color and the name changed with the report’s first public release in 1983.
15. The Federal Reserve also puts out “Green” and “Blue” books with appropriately colored covers that forecast, respectively, economic activity for the immediate future, and forecasts and analysis of monetary policy alternatives. Unlike the Biege Book, however, the Blue and Green books are not made available to the public.
16. The Federal Reserve is also responsible for issuing and destroying the nation’s coin and paper currency. The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation’s cash supply and, in effect, sells it to the Federal Reserve Banks at manufacturing cost, currently about 4 cents per bill for paper currency. The Federal Reserve Banks then distribute it to other financial institutions in various ways. Critics believe that the Fed’s charter to issue money violates Article I, Section 8 of the US Constitution.
17. The bills in your wallet are officially known as Federal Reserve Notes; they are a form of fiat currency and are not backed by tangible assets such as gold or silver. Alphabetic notations on the front side of each bill identify which of the 12 Fed-bank headquarters issued the note: Boston (A); New York (B); Philadephia (C); Cleveland (D); Richmond (E); Atlanta (F); Chicago (G); St. Louis (H); Minneapolis (I); Kansas City (J); Dallas (K); and San Francisco (L).
18. Conspiracy theorists believe John F. Kennedy was assassinated because of Presidential Executive Order 11110. The theorists argue that was because the executive order was a direct attempt to usurp the Federal Reserve’s power. Of course, there are others who find that particular conspiracy theory and supporting argument to be pure poppycock. 😉
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