Money, Banking & The Federal Reserve: A Brief History

1. Money, Banking & The Federal Reserve:A Brief History Prepared by Lauren Woodliff for

2. 1775-1791: U.S. Currency • To finance the American Revolution • Continental Congress printed the new nation's first paper money.  • Known as "continentals," • Over production led to inflation

3. 1791-1811: First Attempt at Central Banking • Congress established the First Bank of the United States, headquartered in Philadelphia, in 1791. • Largest corporation in the country • Dominated by big banking and money interests. • Made some Americans uncomfortable and only lasted 20 years.

4. 1816-1836: A Second Try Fails • Political climate was once again inclined toward the idea of a central bank. • Congress charters the Second Bank of the United States. • Again, only lasted 20 years.

5. 1836-1865: The Free Banking Era • State-Chartered Banks & unchartered “free banks” • Issued their own ‘notes’.

6. 1863: National Banking Act • Passed during the Civil War • Required taxation on state bank notes • Effectively created a uniform currency for the nation.

7. 1873-1907: Financial Panics • Financial panic plagues economy. • Growing consensus that a central banking authority was needed to ensure a healthy system and an elastic currency.

8. 1913: The Federal Reserve System is Born In December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise—a decentralized central bank that balanced the competing interests of private banks and populist sentiment. 

9. 1914: Open for Business November 16, 1914 • 12 cities chosen as sites for regional Reserve Banks were open for business, just as hostilities in Europe erupted into World War I. 

10. 1920s: The Beginning of Open Market Operations • Open market operations as a monetary policy tool • Promoting relations with other central banks, especially the Bank of England elevated the stature of the Fed. 

11. 1929-1933: The Market Crash and the Great Depression • Warnings that stock market speculation would lead to dire consequences realized. • October 1929, the stock market crashed and the nation fell into the worst depression in its history. • Blamed speculative lending and inadequate understanding of monetary economics and policies.

12. 1933: The Depression Aftermath • Congress passed the Banking Act of 1933 • Separation of commercial and investment banking. • Required use of government securities as collateral for Federal Reserve notes • Established the Federal Deposit Insurance Corporation (FDIC). • Required bank holding companies to be examined by the Fed.

13. More Changes.. • The Banking Act of 1935 Amendments • Creation of the Federal Open Market Committee (FOMC) • The Employment Act follow WWII added maximizing employment responsibilities • Bank Holding Act of 1956- increased regulations for bank holding companies

14. 1970s: Inflation The 1970s saw inflation skyrocket as producer and consumer prices rose, oil prices soared and the federal deficit more than doubled.

15. 1980s: Deflation & Financial Modernization • The Monetary Control Act of 1980 required the Fed to price its financial services competitively against private sector providers and to establish reserve requirements for all eligible financial institutions. • Marked the beginning of a period of modern banking industry reforms

16. 1990s: The Longest Economic Expansion • Banks offer a menu of financial services, including investment banking and insurance.  • The decade was marked by generally declining inflation and the longest peacetime economic expansion in our country’s history. 

17. After the 90’s The effectiveness of the Federal Reserve as a central bank was put to the test on September 11, 2001 as the terrorist attacks on New York, Washington and Pennsylvania disrupted U.S. financial markets.

18. 9/11/01: Fed issued this statement “The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.”

19. The Recovery • In the days that followed, the Fed lowered interest rates and loaned more that $45 billion to financial institutions in order to provide stability to the U.S. economy.  • By the end of September, Fed lending had returned to pre- September 11 levels • The Fed played the pivotal role in dampening the effects of the September 11 attacks on U.S. financial markets. 

20. After September 11, 2001 • In the days that followed, the Fed lowered interest rates and loaned more that $45 billion to financial institutions in order to provide stability to the U.S. economy.  • By the end of September, Fed lending had returned to pre- September 11 levels • The Fed played the pivotal role in dampening the effects of the September 11 attacks on U.S. financial markets. 

21. January 2003: Discount Window Operation Changes • Federal Reserve changed its discount window operations • Rates at the window set above the prevailing Fed Funds rate • Provided rationing of loans to banks through interest rates. 

22. 2006 and Beyond: Financial Crisis • During the early 2000s, low mortgage rates and expanded access to credit made homeownership possible for more people, increasing the demand for housing and driving up house prices. • Securitization of riskier mortgages expanded rapidly, including sub-prime mortgages made to borrowers with poor credit records. • House prices faltered in early 2006 and then started a steep slide, along with home sales and construction. • Falling house prices meant that some homeowners owed more on their mortgages than their homes were worth.

23. 2007: A crisis point • Fears about the financial health of other firms led to massive disruptions in the wholesale bank lending market. • Rates on short-term loans rose sharply relative to the overnight federal funds rate. • The rising number of delinquencies on sub-prime mortgages was a wake-up call to lenders and investors that many residential mortgages were not nearly as safe as once believed. • As the mortgage meltdown intensified, expected losses rose dramatically. • Losses spread across the globe.

24. 2008: Outlook No Less Grim • In the fall of 2008, two large financial institutions failed: the investment bank Lehman Brothers and the savings and loan Washington Mutual. • The extensive web of connections among major financial institutions meant that the failure of one could start a cascade of losses throughout the financial system. • Confidence in the financial sector collapsed and stock prices of financial institutions around the world plummeted

25. Ripple Effect • Banks and investors clamped on loans. • Tightened standards and higher interest rates—a classic credit crunch. • Tight credit weakened spending on items financed by borrowing: houses, cars, and business investment. • Households cut back on spending, affecting the supply and demand of the economy. • Demand weakened, businesses canceled expansion plans and laid off workers.

26. Sad But True • The U.S. economy entered a recession, a period in which the level of economic activity was shrinking, in December 2007. • The recession had been relatively mild until the fall of 2008 when financial panic intensified, causing job losses to soar.