On December 23, 1913, Congress passed the Federal Reserve Act which created the Federal Reserve Bank and Federal Reserve System.

After the Revolutionary War, the U.S. government and its individuals states were in debt. Further, each state had its own currency and the U.S. had no way to monitor currencies on a federal level. Secretary of the Treasury, Alexander Hamilton, advocated the creation of a federal central bank to manage the government’s money, regulate the nation’s credit, and create a single federal currency. However, many disagreed with Hamilton, including Secretary of State, Thomas Jefferson, who argued that the Constitution did not empower Congress to create a central bank.

Hamilton eventually won the argument and the First Bank of the United States was chartered in 1791. However, the First U.S. Bank failed to properly regulate America’s complex economy, and in 1811, Congress voted to dissolve the First U.S. Bank.

Five years later, in 1816, Congress charted the Second U.S. Bank to tackle the problems that the First U.S. Bank could not fix. However, the Second U.S. Bank overextended itself by loaning out too much money, fell prey to fraud and corruption, and then began to lose money and the support of Congress. The Second U.S. Bank eventually went bankrupt in 1841.

The U.S. went without a central federal bank for another eighty years. However, after various financial panics and unstable currencies, Congress again faced the dilemma of how to create a federal bank. In the late 1900s, Congress created a commission to analyze and review how to create a successful federal bank. After much research, debate, and negotiations, Congress finally came up with a plan.

On December 23, 1913, President Woodrow Wilson singed Congress’ Federal Reserve Act which created the Federal Reserve Bank and Federal Reserve System as the central banking system of the United States.

Under the Act, Congress established twelve private regional Federal Reserve banks with their own branches, board of directors, and district boundaries throughout the U.S. Congress also set up the Federal Reserve System to be headed by a seven member Federal Reserve Board made up of public officials appointed by the President. The Act also created a single U.S. currency, the Federal Reserve Note, i.e. the U.S. dollar, also called the “greenback.” And the Act set up a 12 member Federal Advisory Committee to assist the Federal Reserve in monetary policy.

Further, through the Act, Congress required all nationally chartered banks to become members of the Federal Reserve System. These banks had to purchase specified non-transferable stock in their regional Federal reserve bank and to set aside a certain amount of cash as “reserves” with their respective reserve bank. State chartered banks were granted the option of becoming members of the Federal Reserve System. Today, the Federal Reserve, commonly called the “Fed, performs many functions, including: (i) serving as the banker for the federal government; (ii) monitoring the nation’s supply of money and credit; (iii) supervising a large portion of the nation’s banking system; (iv) offering many financial services; and (v) administering financial consumer protection laws, among other responsibilities.

The Fed is the United State’s money manager. The Fed creates and directs monetary policy to manage the flow of money and credit within the U.S. economy. For example, if the flow of money and credit rise too rapidly, businesses would not be able to produce enough goods and services to keep up with increased spending. As such, prices would likely rise, causing inflation. Conversely, if the flow of money and credit slow down too much, businesses would eventually have a difficult time in obtaining money for loans and other projects, which would lead to slower job growth, higher unemployment, and even economic recession.

In short, the Fed conducts monetary policy in an attempt to balance the flow of money and credit, to keep prices somewhat steady, workers employed, and businesses productive.