Federal Reserve Act (Owen-Glass Act) of 1913


Financial system intended to “furnish an elastic currency [and] … to establish a more effective supervision of bank-ing.”

The Aldrich-Vreeland Emergency Currency Act of 1908 created the National Monetary Commission to recommend reforms for the nation’s banking system. In 1911 the commission, with Republican Senator Nelson Aldrich of Rhode Island as chair, issued a 49-volume report that called for the creation of a National Reserve Association run by private bankers and free of any real government control. The proposal never passed, and in 1912 the Democrats won control of the presidency and Congress. After his inauguration in 1913, President Woodrow Wilson called for extensive banking reforms. After a six-month debate, Congress passed the Owen-Glass Act on December 23, 1913, creating the Federal Reserve system. This system consisted of 12 regional banks coordinated by a central Federal Reserve Board. The act required all national banks to become members of the system, and state-chartered banks that met membership requirements could join. The act also required member banks to transfer a percentage of their capital for stock in the Federal Reserve system that holds members’ deposits, creates new credit with additional reserves, and makes loans. After mid-1917, the Federal Reserve Bank required member banks to keep all of their reserves in their Federal Reserve district banks. The Federal Reserve raises and lowers the interest percentage that member banks must pay the Federal Reserve to borrow money, thus exercising great influence on the availability of credit for private borrowers.

The seven-member Federal Reserve Board assumed office in August 1914, and the Federal Reserve banks started to provide service three months later. By 1923 the Federal Reserve system controlled 70 percent of the banking resources in the United States. In 1933 and 1935 Congress passed acts that increased the Federal Reserve’s power to control credit. In 1963 Congress amended the Federal Reserve Act to permit the Federal Reserve to increase the amount of money in circulation by issuing Federal Reserve notes instead of silver certificates. As a result, nearly all U.S. paper currency now consists of Federal Reserve notes backed by neither gold nor silver.

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