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Woodrow Wilson didnt know much about banking and he asked for advice from Virginia Representative Carter Glass. Glass was soon to become the chairman of the House Committee on Banking and Finance. Throughout the year of 1912, Glass and Wilson worked on a central bank proposal, by December of the year 1912 the Federal Reserve Act came upon.
From December 1912 to December 1913, the Glass and Willis proposal changed completely.By December 23,1913, President Woodrow Wilson signed the Federal Reserve Act, so it can become a law. This balanced the competing interest of private banks.
Before the new back could begin their work, they had to build a working institution around the area for the new law. By November 16,1914, the 12 cities that were chosen as sites for regional Reserve Banks were open for business.
World War I Started around 1914, the Banks in the U.S didnt change one bit. All thanks to the emergency currency issued under the Aldrich-Vreeland Act of 1908. The banks in the U.S helped other banks. The United States would trade goods to Europe because they needed help during the war. Until 1917, the U.S declared war on Germany and this became a big chaos.
During the 1920s Glass warned the stock market that this was only going to bring problems. In October 1929, his predictions came true because the stock market had crashed and the nation fell into the worst depression in history. From 1930 to 1933, almost 10,000 banks failed and by March 1933, President Franklin Delano Roosevelt declared a bank holiday. Many government officials looked for ways to make the nations economy better. A lot of people blamed the Fed for this crash.
In the reaction to the Great Depression congress passed the banking Act of 1993. calling for the separation of commercial and investment banking and requiring use of government. They also established the Federal Deposit Insurance corporation. Also as part of the massive reforms taking place.
The Banking Act of 1935 called for further changes in the Feds structure, including the creation of the Federal Open Market Committee (FOMC) as a separate legal entity, removal of the Treasury Secretary and the Comptroller of the Currency from the Feds governing board and establishment of the members terms at 14 years. Following World War II, the Employment Act added the goal of promising maximum employment to the list of the Feds responsibilities. In 1956 the Bank Holding Company Act named the Fed as the regulator of bank holding companies owning more than one bank, and in 1978 the Humphrey-Hawkins Act required the Fed chairman to report to Congress twice annually on monetary policy goals and objectives.
The Federal Reserve system agreed to have a low interest rate peg on government bonds in 1942 after the United states went to world War II.The reason why they did this was to have a cheaper debt finance for the war. To have the pegged rate, The Fed was forced to give up control of the size of the portfolio and the money stock. Problems came upon the Treasure and the Fed. The treasury wanted the central bank to maintain the peg after the start of the Korean war in 1950. President Harry Truman and Secretary of the Treasure John Snyder supported the low interest rate peg. A lot of people argued over this rate peg but they came into an agreement that was called the Treasury-Fed Accord.
The Federal Reserve changed its discount window operation in 2003. Now the rates at the window are set above the prevailing Fed Funds rate and provide rationing of loans to banks.