The Birth of the Federal Reserve

During the early 1900s, the United States experienced several financial panics, which caused great distress. One of the worst occurred in 1906, prompting the government to take action. In 1913, they passed the Federal Reserve Act to mitigate the impact of these crises and prevent them from happening again.

Before the Act, banks kept their money reserves (kind of like their emergency fund) in big banks in New York, known as Wall Street banks. The issue was that in times of financial panic, larger banks could block the smaller banks’ access to their own funds.

It had been reported that, on occasion, Wall Street banks had utilized reserve funds for speculative purposes, including placing bets on the stock market.

When these bets failed to yield positive results (often the case), it led to further financial difficulties. Officials believed this type of speculative gambling played a significant role in causing economic recessions and deflation.

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The Act established 12 Federal Reserve Banks across the nation to serve as a secure storage location for the reserves of smaller banks. The intention behind this arrangement was to guarantee that smaller banks could access their funds at all times, even in a panic. Additionally, this system was…