Omar Bennett
The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank of the United States, providing the nation with a safer, more flexible, and stable monetary and financial system. The Act has been amended several times, including in 1933 to create the Federal Open Market Committee and in 1977 to require the Board and the FOMC to promote maximum employment and stable prices. Critics argue that the Federal Reserve's establishment may have violated the Constitution as it is not mentioned in the document and the 10th Amendment states that the federal government only has powers expressly granted to it.
| Characteristics | Values |
|---|---|
| Established | 1913 |
| Established by | Democratic Senator Robert D. Owen and Virginia Representative Carter Glass |
| Signed by | President Woodrow Wilson |
| Purpose | To establish a central bank to provide the nation with a safer, more flexible, and more stable monetary and financial system |
| Amendments | 1917, 1927, 1933, 1935, 1977 |
| Amendment purposes | To enable monetary expansion to cover the costs of World War I, restructuring of the Fed's districts, creating the Federal Open Market Committee, requiring the Federal Reserve to aim for maximum employment, stable prices, and moderate long-term interest rates |
| Criticism | The Constitution does not mention a centralized bank, and the 10th Amendment states that the federal government only has the powers expressly granted to it |
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What You'll Learn
The Federal Reserve Act of 1913
Prior to the establishment of the Federal Reserve, the United States lacked a central banking structure, resulting in immobile reserves and an inelastic currency. The absence of a centralized bank meant that the country relied on private individuals, such as J.P. Morgan, to bail out the government during financial crises. The Panic of 1907 highlighted the need for a centralized banking system, as the government recognized that it could not solely depend on wealthy individuals to resolve economic crises.
Over time, the Federal Reserve Act has been amended numerous times to adapt to changing circumstances. For example, amendments were made to accommodate the admission of Hawaii and Alaska to the Union and to restructure the Fed's districts. In 1917, Congress passed significant amendments to allow monetary expansion to cover the costs of World War I, leading to price inflation. The Banking Act of 1933 created the Federal Open Market Committee to oversee the Federal Reserve's open market operations. Subsequent amendments have required the Federal Reserve to aim for maximum employment, stable prices, and moderate long-term interest rates.
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Amendments to Federal Reserve Act
The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank of the United States, providing the nation with a safer, more flexible, and more stable monetary and financial system. The Act has been amended several times by Congress, including:
1917 Amendments
In June 1917, Congress passed major amendments to the Federal Reserve Act to enable monetary expansion to cover the expected costs of World War I. The amendments allowed a more flexible definition of the gold backing the dollar currency in circulation, de facto allowing less gold backing for each dollar note. This led to a more than doubling of the currency in circulation from $465 million to $1.247 billion between June and December 1917.
1927 Amendment
On February 25, 1927, the Federal Reserve Act was amended to allow for succession until dissolved by an Act of Congress or until the forfeiture of the franchise for violation of law. This amendment was significant as it helped the Federal Reserve System survive during the Great Depression in 1933 when public sentiment towards the banking community deteriorated.
1933 Amendment
In 1933, the Banking Act amended the Federal Reserve Act to create the Federal Open Market Committee (FOMC), consisting of the seven members of the Board of Governors of the Federal Reserve System and five representatives from the twelve Federal Reserve Banks.
1977 Amendment
On November 16, 1977, the Federal Reserve Act was amended to require the Board and the FOMC to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. The Chairman was also required to appear before Congress at semi-annual hearings to report on monetary policy, economic development, and future prospects.
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Federal Reserve's constitutionality
The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank of the United States. The Federal Reserve, also known as the Fed, regulates the money supply and interest rates in the economy. It has more independence than other government bodies, and its decisions influence the nation's economy and financial dealings worldwide.
However, critics argue that the Federal Reserve is unconstitutional. They point out that the US Constitution does not mention a centralized bank or explicitly grant the government the power to create one. The 10th Amendment states that the federal government only has powers expressly granted to it. Thus, some argue that the creation of the Federal Reserve was a violation of the Constitution. The Fed's quasi-public, quasi-private structure has also been criticized as unconstitutional, with policymakers being picked by a quasi-private structure. There are also calls for more transparency and accountability within the organization.
On the other hand, some argue that the Federal Reserve's independent structure has historical precedent in the Founding-era agency known as the Sinking Fund Commission, which conducted open market purchases of US securities with substantial independence from the President. This independent structure was proposed by Alexander Hamilton, passed by the First Congress, and signed into law by President George Washington.
The Federal Reserve Act has been amended numerous times, including to create the Federal Open Market Committee, which oversees the Federal Reserve's open market operations, and to specify that the Federal Reserve should aim for maximum employment, stable prices, and moderate long-term interest rates. Congress has the power to amend the Act and has done so over 200 times.
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Federal Reserve's accountability
The Federal Reserve Act of 1913 established the Federal Reserve System as an independent central bank and the central bank of the United States. The Act sets out the purposes, structure, and functions of the System, as well as outlines aspects of its operations and accountability. The Federal Reserve Board of Governors in Washington, DC, is responsible for monetary policy and interest rates, with little control from Congress and the president.
The Federal Reserve has been criticised for its lack of transparency and accountability. Some critics argue that the Federal Reserve Banks are too closely tied to the private sector, with each reserve bank structured as a corporation, and shares held by commercial banks. The Board of Governors, consisting of seven members, is appointed by the US president and confirmed by the Senate. However, critics argue that these officials typically have close ties to the banks they oversee and are therefore more likely to turn a blind eye to any wrongdoing.
To ensure financial accountability, the financial statements of the Federal Reserve Banks and the Board of Governors are audited annually by independent, outside auditors and published on its website. Additionally, the Government Accountability Office and the Board's Office of Inspector General frequently audit many Federal Reserve activities. The Board of Governors also publishes the Federal Reserve's balance sheet weekly and regularly reports the results of supervisory stress tests of large banks.
The Federal Reserve's policy goals of price stability and maximum sustainable employment are specified by Congress, and Fed officials, including the Chair of the Board of Governors, report regularly to Congress on their progress toward meeting those goals. The Board of Governors also prepares an annual report summarising the activities of the Board and all Reserve Banks, which is delivered to Congress.
To further enhance transparency and accountability, the minutes of the Federal Open Market Committee (FOMC) meetings are released to the public after a short time lag. The FOMC is composed of the seven members of the Board of Governors of the Federal Reserve System and five representatives from the twelve regional Federal Reserve Banks.
In 2023, the Federal Reserve Accountability Act was introduced, aiming to change the appointment process for certain officials on the Board of Governors and make other operational changes.
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Federal Reserve's transparency
The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank of the United States. The Act sets out the purposes, structure, and functions of the System, as well as outlines aspects of its operations and accountability. However, critics of the Federal Reserve argue that it is not fully accountable or transparent. The U.S. Constitution does not mention the need for a central bank, and it does not explicitly grant the government the power to create one. Those who adhere to a strict interpretation of the Constitution believe that the government does not have any authority that is not specifically listed as one of the enumerated powers of Congress.
Calls for greater transparency and accountability within the Federal Reserve have been made over the years. For example, Rep. Wright Patman made a series of requests for greater information from the Fed, arguing that more detailed material was necessary for Congress to properly oversee the administration of the nation's money. In addition, there have been occasional adverse events, such as episodes of financial instability, that have led to periodic calls for greater transparency in various functions, such as financial institution supervision and discount window lending.
The Federal Reserve has taken steps to increase transparency and accountability. For example, the Dodd-Frank Act of 2010 required the Fed to disclose all discount window loans going forward, with a two-year lag. Additionally, all 12 Federal Reserve Banks have adopted a common policy for public requests for information, known as the Transparency and Accountability Policy, which came into effect on January 1, 2024. This policy simplifies and standardizes the public information request process.
In 2025, the Federal Reserve Transparency Act was introduced in Congress. This bill directs the Government Accountability Office (GAO) to complete an audit of the Federal Reserve Board and Federal Reserve banks within 12 months, including with respect to international financial transactions, monetary policy matters, and transactions made under the direction of the Federal Open Market Committee. While the Federal Reserve has taken steps to increase transparency and accountability, critics continue to call for more comprehensive reforms to ensure that the institution is fully accountable to the public and aligned with the principles laid out in the U.S. Constitution.
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Frequently asked questions
The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank of the United States. It provides the nation with a safe, flexible, and stable monetary and financial system.
The Federal Reserve Act has been amended numerous times. Some significant amendments include the creation of the Federal Open Market Committee in 1933, requiring the Federal Reserve to aim for maximum employment and stable prices, and amending the Act to account for the admission of Alaska and Hawaii to the Union.
Critics argue that the Federal Reserve was not established under the rules set out by the Constitution, as it is not mentioned in the Constitution and the government does not have explicit power to create a central bank. They also argue that the Federal Reserve Banks are too closely tied to the private sector, and that the system violates constitutional law by allowing public policymakers to be picked by a quasi-private structure.
