Federal Reserve System
The Federal Reserve System, created by Congress in 1913, is the central banking system of the United States. It sets the benchmark interest rate, regulates money supply, and acts as lender of last resort to the banking system. Though presented as a public institution, the Federal Reserve was designed by private bankers and its structure gives primary decision-making power to its member banks rather than to elected officials.
The Federal Reserve was conceived at a secret meeting on Jekyll Island, Georgia in 1910, where representatives of the major American banking dynasties, including agents of JP Morgan, Rockefeller interests, and the Kuhn, Loeb investment bank, drafted legislation that was then guided through Congress as the Federal Reserve Act of 1913. The meeting was conducted in secrecy because its participants knew that a bill visibly written by bankers for bankers would face political opposition. The legislation was presented to Congress and the public as a reform that would end financial panics and protect the public interest.
Structurally, the Federal Reserve is a hybrid public-private institution. Its Board of Governors is appointed by the President, but the twelve regional Federal Reserve Banks are owned by their member banks, which are private institutions. The member banks elect the regional bank presidents who participate in setting monetary policy. This means that the institutions the Federal Reserve is supposed to regulate have formal voting power in the institution that regulates them, a structural conflict of interest that would be illegal in virtually any other regulated industry.
The interest rate set by the Federal Reserve is the most important price in the American economy, because it determines the cost of credit throughout the entire system. When the Fed sets a low rate, banks can borrow cheaply and are signaled to increase lending across the economy. When it sets a high rate, credit tightens. The consequences of these decisions are felt by every person who holds a mortgage, carries consumer debt, or works in an industry dependent on credit. The decisions are made by a body that is formally insulated from democratic pressure and institutionally connected to the interests of major financial institutions.
The Federal Reserve was established the same year as the income tax and shortly before the United States entered World War I. Critics have long noted this proximity: the ability to levy income taxes provided the government a reliable revenue stream that could service war debt, while the Federal Reserve provided the mechanism to create the money that would fund the war in the first place. The sequence, private central bank, income tax, world war, has repeated in different forms in the decades since.
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Frequently asked questions
Is the Federal Reserve a government institution? ＋
The Federal Reserve is a hybrid. Its Board of Governors is appointed by the President, suggesting public accountability. But the twelve regional Federal Reserve Banks are owned by their private member banks, which elect the regional presidents who participate in monetary policy decisions. The institutions the Fed regulates thus have formal voting power in the institution that sets the rules they operate under.
Why was the Federal Reserve created in 1913? ＋
Officially, the Federal Reserve was created to prevent banking panics like the one in 1907. The actual legislation was drafted in secret by representatives of the dominant banking dynasties and guided through Congress by politicians aligned with those interests. Its creation gave private financial institutions coordinated control over the money supply and lending conditions of the entire American economy, modeled directly on the Bank of England.