On December 23rd, 1913 the Federal Reserve was established.
Prior to this, Congress discussed their concerns about the management of the banking system in the United States. Many Americans were fearful that the banking system was not stable and that they would later worry about the liquidity of their assets. Considering how the U.S. banking system’s lack of improvements in its organization and structure, it became more clear and necessary to take initiative in writing reforms on how the banking system could improve.
In 1913, the Federal Reserve Act passed and it addressed the political and economic concerns of the United States Banking system. As the United States central bank, the Federal Reserve (FED) “works to conduct the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S.
economy.” The Reserve also promotes the stability of the financial system while seeking to minimize and contain systemic risks through active monitoring and engagement of financial markets in the U.S. and abroad. The FED takes charge of regulating financial markets and the overall banking and monetary systems as well.
This coordination includes fostering payment, settlement system safety and, efficiency through services to the banking industry. Moreover, these processes allow the U.S. government to facilitate U.S.
dollar transactions and payments. Lastly, the FED works on consumer protection and performs research analysis on laws, regulations, issues and trends concerning economic development. 1907 Banking Panic Many historians believe that the panic of 1907 spurred on the formation of the Federal Reserve, being the first world wide crisis of the twentieth century.
This panic was related to the confusion of New York City trust companies: “state-chartered intermediaries that competed with banks for deposits, but they were not as central to the banking system as banks” (Moen). These trusts held a lower percentage of cash reserves relative to its deposits. Similar to “banks, trust company accounts were demandable in cash, so they were also susceptible to runs” (Moen). Although trusts had smaller roles in the payment transactions system, they were and are a crucial part of the financial system due to the large loans made in New York equity markets including the NYSE.
Trusts did not require collateral for the loans. These had to be repaid by the end of the day by brokers in order to use these loans to buy securities either for themselves or for their clients. The securities acted as collateral for a ‘”call loan”: “an overnight loan that facilitated stock purchases from a nationally chartered bank through which the gains from the call loan were used to pay back the initial loans from the trust” (Moen). These trusts were extremely important because the law prohibited nationally “chartered commercial banks from making uncollateralized loans and did not guarantee the payment of checks written by brokers on accounts without a sufficient amount funds” (Moen).
In October, however, the New York Clearing House broke news that the president of Knickerbocker Trust, Charles Barney, was an associate of a failing trust called Morse. This event