The Federal Reserve System, created with the passage of the Federal Reserve Act on December 23, 1913, is the central banking system of the United States. The Federal Reserve System, popularly known as the Fed, was created in the hope that centralized, regulated control of the nation’s monetary system would help mitigate or prevent financial crises like the Panic of 1907.

In creating the Fed, Congress sought to maximize employment, stabilize the prices of goods and services, and mitigate the long-term effects of changes in interest rates. Organizations such as Payday Depot have recently emerged as part of the overall financial system in the country.

Beginning of American banking: 1791–1863

Banking in America in 1863 was far from simple and unreliable:

· The First Bank (1791-1811) and Second Bank (1816-1836) of the United States were the only official representatives of the United States Treasury and the only sources that issued and supplied official United States money.

· All other banks were run by the state or by individuals. Each bank has issued its note.

· All public and private banks competed with each other and with the two US banks to ensure that their notes could be redeemed at full face value. When you traveled across the country, you never knew exactly what kind of money you would receive in local banks.

With the growth of the American population, its mobility and its economic activity, this multitude of banks and types of currency quickly became chaotic and unmanageable.

National banks: 1863–1913

In 1863, the United States Congress passed the first national banking law, providing for a controlled system of national banks. The law set standards for the operation of banks, set minimum amounts of capital banks were required to hold, and defined how banks were to make and manage loans.

In addition, the law introduced a 10% tax on government notes, which effectively eliminated non-federal currency from circulation.

1913: Creation of the Federal Reserve System

In 1913, the economic growth of the United States, both at home and abroad, demanded a more flexible but better controlled and safer banking system. The Federal Reserve Act of 1913 started the Fed system as the nation’s central banking organization.

In accordance with the Federal Reserve Act of 1913 and changes made over the years, the Federal Reserve system:

· Conducts US monetary policy.

· Supervises and regulates banking and consumer credit.

· Maintains the stability of the US financial system.

· Provides financial services to the US federal government, the public, and foreign financial institutions.

The Federal Reserve makes loans to commercial banks and is authorized to issue Federal Reserve Notes, which make up the entire US supply of paper money.

Any bank that uses the expression National Bank in its name must be a member of the Federal Reserve. They must maintain a minimum level of reserves at one of the 12 Federal Reserve Banks and must pay interest on savings accounts and deposits in their customers’ checking accounts with a Federal Reserve Bank.

All banks incorporated under the national charter are required to become members of the Federal Reserve System. Banks registered under state laws can also apply to become members of the Federal Reserve.

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