During the Depression, in a small town 200 miles from Minneapolis...a large crowd was gathering outside the bank. The restive throng was clamoring for their money. The frantic banker called the Federal Reserve Bank in Minneapolis, and warned that unless the "mad run" was stopped, he would soon be out of currency.
A small plane was chartered and two Fed officials, along with a half-million dollars in small denomination bills, was quickly flown to the town. Upon their approach, the pilot guided the plane low over the main street to dramatize its arrival...and then landed in a nearby field. From there the Fed officials were ceremoniously escorted into town by the police and the money was stacked along the bank's teller windows. The sight of all that money piled up inside the bank quelled the customers' fears...and saved the bank from failing.
This true-to-life account illustrates one of the key responsibilities given to the Federal Reserve System...which was created on December 23, 1913 when President Woodrow Wilson signed the Owen-Glass Act, creating the Federal Reserve System.
The Banking Panic of 1907, the most severe of four national banking panics that had occurred during the previous 34 years, was the primary inspiration for the major banking reform that led to the creation of the Fed. Previously, the banking system was dominated by two flaws: it was prone to panics, and the currency was not responsive to changes in demand.
Banking panics were an especially nettlesome feature of the US economy. Since banks and bankers were singularly unrelated and independent of each other, the majority of them were in a life and death contest with each other...forgetting the solidarity of their mutual interest and their responsibility to the community at large. During panics, two-thirds of the banks engaged in an internecine struggle to obtain cash, ceased to extend credit to their customers, suspended cash payments, and hoarded all of the money that they had. The sad and predictable result was that many thousands were thrown out of work, firms went into bankruptcy, the trade of the country came to a standstill...all because the credit system of the country had ceased to operate.
The Federal Reserve remains the central banking authority of the United States, establishing banking policies, interest rates, and the availability of credit. Expanded since its founding, the Federal Reserve consists of a Board of Governors, nominated by the president and confirmed by the Senate, twelve regional Federal Reserve banks, the Federal Open Market Committee, the Federal Advisory Council, a Consumer Advisory Council, and several thousand member banks.
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