Federal Reserve Act

The Federal Reserve Act, signed into law by President Woodrow Wilson on December 23, 1913, established the Federal Reserve System as the central bank of the United States. Formally titled "An Act to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes," it was the culmination of decades of agitation for banking reform that intensified after the Panic of 1907. The legislation drew on the recommendations of the National Monetary Commission led by Senator Nelson Aldrich, whose 1910 Jekyll Island plan was substantially revised by Carter Glass and H. Parker Willis into the Glass-Owen bill. Its constitutional footing rests on Congress's powers under Article I, Section 8 to coin money, regulate its value, and regulate interstate commerce — powers earlier affirmed in McCulloch v. Maryland (1819).

The Act created a deliberately decentralized structure to reconcile populist distrust of a single Wall Street bank with the need for centralized monetary control. It established twelve regional Federal Reserve Banks (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco), each serving a district, supervised by a Federal Reserve Board in Washington (now the Board of Governors). The system's core functions were to furnish an "elastic currency" through the issuance of Federal Reserve Notes, to act as lender of last resort by rediscounting commercial paper, and to supervise member banks — all national banks were required to join, while state banks could opt in. The 1913 framework was significantly expanded by the Banking Act of 1935, which created the Federal Open Market Committee (FOMC) and consolidated power in the Board of Governors, giving the modern Fed its open-market-operations toolkit.

In its 2026 form, the Federal Reserve pursues the statutory "dual mandate" of maximum employment and stable prices, codified in the Federal Reserve Reform Act of 1977. The FOMC sets the federal funds target rate; the Fed conducts open market operations, sets reserve and discount-window policy, and serves as fiscal agent for the Treasury. Landmark exercises of its authority include the quantitative-easing programs after the 2008 financial crisis and the emergency lending facilities deployed in March 2020. Chairs from Marriner Eccles through Paul Volcker, Alan Greenspan, Ben Bernanke, and Jerome Powell have shaped its evolution toward an independent but congressionally accountable institution.

For the FSOT (U.S. History, Government, and the U.S. economy sections), the Federal Reserve Act is a high-frequency item. Examiners typically test the 1913 date, Wilson's signature, the Progressive-Era context (Panic of 1907, Aldrich plan, Glass-Owen bill), and the twelve-bank decentralized design as a compromise. Questions also probe the contrast with the failed First and Second Banks of the United States, the Fed's independence from the executive branch, and the dual mandate. Candidates should be able to distinguish the original Act from later amendments (1935, 1977) and to identify the Fed's policy tools versus fiscal tools controlled by Congress and the Treasury.