The Federal Reserve Act of 1913

  • Essay 1 response for PS 1000, Wayne State, Winter 2013.
  • Example of teaching/learning mechanism: compare your essay to mine.
  • Niche audience: institutions, rational choice, historical.

ARTICLE: The Federal Reserve Act of 1913 by O. M. W. Sprague  The Quarterly Journal of Economics, Vol. 28, No. 2 (Feb., 1914), pp. 213-254

This article is designed to explain The Federal Reserve Act of 1913 (henceforth Fed). The lengthy paper details how the Fed is organized, directed, and especially how the Fed will function. This paper is a detailed historical account regarding how the Fed was originally organized and implemented into existence. In the next few paragraphs, I will very briefly note the main points respecting how the Fed is organized and directed, and how the Fed was originally set-up to function.

The Fed gave the Federal Reserve Banks “good management, and ample powers and resources” (214). The ample power and resources derived from the fact that subscribing banks are required to place part of their reserve with the Federal Reserve Bank (215). Further, if national banks refused to enter into the new Fed system, they would be “involving themselves in a heavy immediate loss” (221) because if the national bank doesn’t sign-up, then the bank will cease to exercise the reserve-holding tight (222) as well as the loss of the bank’s national charter (221). In short, banks were required to sign-up, and then subscribe “an amount equal to six percent of its capital and surplus” (223-224). Indeed, “All these payments are to be made in gold or gold certificates” (224). Once the Federal Reserve Bank has accumulated $4 million, it becomes an active bank.

The article explains in great detail how the Fed will be organized with board members (some of who shall indeed come from the banking industry) and also why the new legislation will create more efficiency in the banking system. For example, the Federal Reserve Banks will be able to issue notes to supply currency without reducing its reserve holdings (237). However, “paper money cannot be issued under the terms of the act for the purposes of meeting government expenditures” (238). Moreover, to be “doubly sure, the rediscount of loans secured by stocks and bonds is specifically prohibited” (243). Therefore, the Fed reorganized the banking system so that hierarchy established good management, power and resources; however, the Fed limited the National Federal Reserve’s ability to manipulate currency.

The benefit of analyzing this article would be most appreciated via a comparative study to the current Fed—additional research. Would a “then and now” study illuminate changes in capitalism and the role of government with respect to the Fed? Is the primary purpose of the Fed the same as it was at its birth: “to make certain that there will always be an available money supply and credit in this country with which to meet unusual banking requirements”? And if the Fed is different in its purpose, do we notice any particular trajectory of Fed power?

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