Central banking has had a perilous and uncertain history in the United States. The country has experimented with three central banks over the course of its history. Two of them met with political opposition and failure in 1811 and 1836. The current central bank, the Federal Reserve System, is rapidly approaching it’s 100th anniversary in 2013. The Federal Reserve played a role in every major historical event of the 20th century. Here is a history of the Federal Reserve.
Prior to the Federal Reserve, the nation had a system of federally-regulated national banks. Unfortunately, this system was unstable and prone to banking panics, leading to uncertainty in the financial system. A crisis spawned by two stock market speculators in 1907 nearly brought down the entire financial system. It became very clear that a nationally-chartered bank must be created to step in and provide lending support to banks. The Federal Reserve Act of 1913 was the result of five years of deliberations, objections and compromises.
Signed into law by Woodrow Wilson, the Federal Reserve was soon thrust into it’s first major test with the outbreak of World War I. The Federal Reserve helped to make sure trade goods continued to flow into Europe until the United States entered the war in 1917. After the war ended, the Fed discovered open market operations, a major part of Fed policy.
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The Great Depression brought a new challenge to the Fed. The stock market crash and banking crisis led to changes in how the system operated. Today, historians and monetary experts blame the Fed for not stopping the crash and Depression. Some people even blame it for starting the Depression. Under new legislation, the Fed was empowered to supervise the banking industry more closely. The right to conduct open market operations was also given exclusively to the Fed.
Inflation and Deflation
The 1970s saw record inflation, which distorted prices and led to a recessionary environment. Fed Chairman Paul Volcker, who took over in the 1980s, raised the Fed Funds rate, which set interest rates at very high levels. This had the effect of bringing inflation down, stabilizing the economy. The 1980s and 1990s saw an unprecedented boom and economic expansion, bringing broad prosperity to millions of Americans.
The Fed Today
The terrorist attacks of 2001, the housing crash and recession have altered the Fed once again. Uncertainty characterizes present Fed policy, with no clear end to the recession in sight. Current options and alternatives are fiercely debated, and there is even talk of ending the Fed for good. The Federal Reserve is under public scrutiny as it never has been before.