18 Facts You Didn’t Know About The Federal Reserve System

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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Comments

  1. 1

    BillDerberg says

    OK I have a few problems with #5. It fails to mention that after Jackson routed out the Den of Vipers, the US had one of the biggest economic expansion periods. Also after the Civil War there was a thirty year period which was the greatest econ. expansion in US history!
    Next #10: The Fed caused the Great Depression by contracted the money supply! Read Morton Friedman. Next there is no mention about the Nixon going off the Gold Standard. You could have done a better job, sorry.

  2. 2

    says

    @Bill: Regarding #5… If I added the “Den of Vipers” story, then I would have had to change the title to “19 Things You Didn’t Know About the Fed.” I didn’t want to do that. As for #10: What am I missing here? That’s what I wrote. Stop copying me!

  3. 3

    Steven-H says

    This is a very interesting article Len.
    Correct me if I am wrong on my next few statements as I am not a financial whiz but re: #16, after Treasury sells the $1.00 bill to the Fed for $0.04, the Fed then resells (or loans) a $1.00 bill back to the U.S. gov’t at face value ($1.00) plus interest.

    And I think the Fed pays NO income tax, state or federal on any profits it makes.
    The Fed may not operate to make a profit, but when they buy for $0.04 & then sell for $1.00, there is a profit there.
    I believe that is a Major profit too.

    Rhetorical questions here: if the Fed isn’t a private organization, why are they refusing an audit by the gov’t? Why are they saying that an audit would harm the U.S. economy?

    • 4

      says

      You are 100 percent correct, Steven. In the example above which you refer to, the profit is essentially 96 cents on every buck created. The process is called “seignorage.” In essence, the private bankers who run the Fed steal from the government, the government then steals from the people.

      This is what happens when a currency is no longer anchored by something of real value — like gold or silver. Instead our currency is based on debt — promises to pay out money in the future. It depends on the full faith of others to accept those promises, otherwise the whole system collapses.

      This is why it is important to reverse the massive debts our government is accruing because eventually, people will no longer have that blind faith in our monetary system that is required for it to function and keep a civil society functioning.

      Many great and wise Americans warned us of the evils of a Central Bank — including Jefferson, Jackson, and even Thomas Edison — but we didn’t listen. We really need to abolish the Fed, as it only cares about making money for its own relatively small cadre of individuals.

  4. 5

    roy begley says

    well it seems odd that LBJ’s first act as president was to rescind kennedy’s
    article which disempowered the fed…
    you know what they say………..
    “follow the money…”

  5. 7

    Ranger says

    This is CRAP the federal reserve is PRIVTE!! If you don’t beleve me, look In the federal pages of your phone book! Did you find a listing for the Federal reserve? NO!!! How about the no trespassing signs on the fed buildings, that say in part “Private property no trespassing” and last but not least, the security officers that work at the federal reserve have and will openly admit it’s PRIVTE!!

    • 8

      Len Penzo says

      Calm down, Ranger. It’s quasi-private, unlike, say, a truly private bank that has to earn a profit for shareholders. Either way, it sounds like we both agree that the Fed is a sham and needs to be abolished.

  6. 9

    Ron paul says

    Paragraph 12 is just nonsense. The fed creates instability in the markets, not stability…that is what booms and busts are. Also, per the banking crisis of 1907, that could have been avoided by FDIC insurance and:
    Banking Panic of 1907
    The New York Stock Exchange dropped dramatically as everyone tried to get their money out of the banks at the same time across the nation. This banking panic spurred debate for banking reform. JP Morgan and others gathered to create an image of concern and stability in the face of the panic, which eventually led to the formation of the Federal Reserve. The founders of the Federal Reserve pretended like the bankers were opposed to the idea of its formation in order to mislead the public into believing that the Federal Reserve would help to regulate bankers when in fact it really gave even more power to private bankers, but in a less transparent way.

    • 10

      Len Penzo says

      First off, I am not a fan of the Fed, but if you are going to say #12 is “nonsense,” how do you explain that there was more instability in the six decades before the creation of the Fed — as evidenced by the Panics of 1857, 1873, 1893, and 1907 — than the 100 years after? Just sayin’, Mr. paul.

      And another thing: how does FDIC insurance work if you are on the gold standard?

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