Federal Reserve Act

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The Federal Reserve: A Knight in Shining Armor

"To suffer either the solicitation of merchants or the wishes

of government, to determine the measure of the bank issues,

is unquestionably to adopt a very false principle of conduct."

-Henry Thornton, 1802

The banker was frantic. A large mob was gathering outside his bank and the people were clamoring for their money. The banker called the Federal Reserve Bank in Minneapolis and warned that unless this "mad run" were stopped, he would soon be out of currency. With the bank nearly two-hundred miles from Minneapolis, a small plane carrying two Federal Reserve Bank officials and a half-million dollars in cash were quickly flown into town. Upon approaching the town the pilot guided the plane low over the main street in a sensational arrival and then landed. From there, the money was carried ceremoniously into town and stacked along the bank's teller windows. The sight of the money calmed the customers fears and saved the bank from failing.

Stories of bank runs- tales of people running to withdraw all their cash from their accounts- may seem dramatic, almost theatrical to people today. But to people living in an economically unstable society, like the early twentieth century, they were an expected occurrence. The banks were independent rivals, the amount of currency in circulation was fixed, and there was no element of trust between the depositor and the bank. Abram P. Andrews, secretary of the National Monetary Commission in 1908 provided a vivid description of the banks' quandary at the time:

"[The banks] were so singularly unrelated and independent of each other that the majority of them had simultaneously engaged in a life and death contest with each other, forgetting for the time being the solidarity of their mutual interest and their common responsibility to the community at large. Two-thirds of the banks of the country entered upon an internecine struggle to obtain cash, had ceased to extend credit to their customers, had suspended cash payments and were hoarding such money as they had." (Born...,12).

The banks, in an attempt...

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...o stabilize the volatile banking system by providing an elastic currency, affording means to distribute the currency, and allowing for government supervision of banking operations. No longer were banks independent organizations working against each other. Now they were secure, interrelated operations. The Federal Reserve Act worked because it eliminated the competition to hoard money between the banks and put the power into the hands of the government. Now, credit could be made available to expanding businesses, jobs could be created, and the banks would no longer have to worry about bank runs "running" them out of business. Because of the Federal Reserve Act, the economy could once again become expansionary with confidence.

Bibliography

"Born out of Panic." (1998, August) The Region, pp 14-16.

Clifford, A. Jerome. The Independence of the Federal Reserve System. Philadelphia: University of Philadelphia Press, 1965.

Hepburn, A. Barton. A History of Currency in the United States. New York: August M. Kelley Publishers, 1915.

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