Federal Reserve Created

Setting the scene

The Federal Reserve System was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act, establishing the United States' central bank. The Fed was created in response to the Panic of 1907, a financial crisis that saw bank runs and stock market collapse, which J.P. Morgan had to resolve privately by organizing bank rescues. The crisis demonstrated the need for a lender of last resort and a more stable banking system. The U.S. had previously had central banks—the First Bank (1791-1811) and Second Bank (1816-1836)—but both were abolished due to political opposition.

What happened

The Federal Reserve Act was a compromise between competing visions: progressives wanted government control, bankers wanted private control. The result was a hybrid system—12 regional Federal Reserve Banks, privately owned by member banks but overseen by a government-appointed Board of Governors in Washington. The Fed was given powers to issue currency (Federal Reserve Notes), set reserve requirements, and act as lender of last resort through the discount window. The system began operations on November 16, 1914.

Why it still matters

The Fed's creation centralized American monetary policy and created the institutional framework for modern macroeconomic management. Initially focused on preventing bank panics, its role expanded during the Great Depression and World War II. The Fed's dual mandate—maximum employment and stable prices—was formalized in 1977. The Fed has become the world's most powerful central bank, its interest rate decisions affecting global markets. Its creation marked the Progressive Era's faith in expert management of the economy, though debates over its independence and power continue today.

Background

It managed currency and banking panics.