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Banking and the Federal Reserve

Federal Reserve Act of 1913

In 1907, the failed attempt to corner the copper market by financiers caused a run on New York City banks. A bank run is when customers go to banks in large numbers and withdraw their money, which causes the bank to then call in their loans to other banks. The ripple effect spread throughout the country and the value of stocks at the New York Stock Exchange fell almost 50 percent. With the country on the verge of a crisis, it was a private citizen, J. P. Morgan, who stepped in to save the banks and halt the crisis. Many financiers and economists worried about what would have happened without J. P. Morgan, and began the call for a national bank that could perform similarly in the future.

After the Panic of 1907, Congress began to seek a preventative solution so that a banking panic or run would never happen again. In order to accomplish this, they passed the Aldrich-Vreeland Act in 1908. The act allowed for the emergency production of currency in a crisis and created the National Monetary Commission. The Commission's job was to investigate any necessary changes to national banking and currency law. They spent three years researching the problem and settled on a plan to create the National Reserve Association.

Many in both houses of Congress, as well as the banking world, attacked the plan proposed by the Commission. They felt it gave too much power to large banks and did not have enough oversight from the government or the public. During the 1912 election, opposition to the Commission's plan was a central piece of the Democratic Party's platform. The Democrats won a majority of congressional seats and the presidency in that election and decided to seek a different solution.

Two solutions came from Democratic Congressman Carter Glass of Virginia and Democratic Senator Robert L. Owen of Oklahoma. Glass was the first to recommend a regional district structure to the Federal Reserve. The bill that Glass suggested, though, only included minimal oversight. Senator Owen felt that there needed to be more government control over the system. Congress spent hours debating the two bills, and both Senator Owen and Congressman Glass convinced many to support their bills. Most of the arguments were about two main issues: Who had control over the central bank and how much control should they have?

Eventually, Senator Owen's bill passed in the Senate and Congressman Glass' bill passed in the House. This meant that the differences in the two bills would have to be worked out in conference. What came out of conference was the Glass-Owen bill, or the Federal Reserve Act of 1913. The bill created the federal reserve system of twelve districts. A regional bank would act on behalf of the American people and their government in each of those districts, along with branch offices that would be opened as needed in each district. All of the banks in the reserve system would be subject to the general oversight of the Federal Reserve Board of Governors, based in Washington, DC. The President of the United States would appoint these board members and the US Senate would confirm his appointments.

The bill created by Senator Owen and Congressman Glass would be one of the most important pieces of legislation passed by Congress in the twentieth century. While there would be bumps along the road, the Federal Reserve System would become an important institution in the financial stability of the United States and play a role in every major event in its history for the next one hundred years.

This map shows the twelve districts of the Federal Reserve System. Kansas City is the Federal Reserve Bank for District Ten. It has branch locations in Denver, Oklahoma City, and Omaha. The Tenth District serves seven states: Colorado, Kansas, Nebraska, Oklahoma, Wyoming, western Missouri, and northern New Mexico (map courtesy of the Federal Reserve Bank of Kansas City).

This is the Seal of the Board of Governors of the Federal Reserve System. If you would like to see a real-life version of this seal, just look at any paper money. It's always located left of the portrait on the front of the bill (image courtesy of the Federal Reserve Bank of Kansas City).

This is a picture of the Senate Banking Committee in session during the debate about the Federal Reserve Act of 1913. At the time, Robert L. Owen, pictured on the right, was head of the committee (image courtesy of the Federal Reserve Bank of Kansas City).