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(“Federal Reserve Board - Photo Gallery”)
Plenty of people may have heard of The Federal Reserve System, but many people are unsure of what this financial institution does.
Many people believe that it is an entirely private institution, while others believe it is a government body.
Many people do not even care to understand what it does.
However, this institution, both publicly and privately operated, is the most integral part of our financial landscape.
The Federal Reserve has demonstrated its effectiveness for the United States and the necessity to aid the country through financial disturbances by managing the country's debts, ensuring that The United States banks had proper liquidity, and reducing the damage that many of these economic disasters would have caused.
(“Federal Reserve Board - Photo Gallery”)
Our modern-day Federal Reserve System was brought into fruition in the year 1913 through The Federal Reserve Act. (“History of the Federal Reserve”)
Throughout history and the modern-day, The Federal Reserve has aided the country from multiple financial crises, including The financial panic of 1907, The Great Inflation of the 1960s, The Great Recession of 2008, and currently with the COVID-19 Pandemic.
The Federal Reserve has also overseen the most significant financial expansion in United States History.
Shortly after the civil war, the United States was faced with its first financial crises.
To finance The American Revolution, the country issues notes called, "Continentals." This was the first form of paper currency, which was not backed by any assets.
As a result, after the war was over, the citizens loss faith in the currency, rendering it useless and causing mass inflation.
The Secretary of the Treasury Alexander Hamilton had made a proposal to form a central bank to best manage the country's debt and issue a proper currency. (“History of the Federal Reserve”)
The first central bank was dismantled by one single vote in Congress.
The early opposers were concerned about the bank interfering with core American values and allowing a select few to control the economy.
This analogy was short-lived as the United States needed to revive The Central Bank to manage another financial crisis.
The United States found itself in a conflict with Britain over a trade dispute. This dispute had directly harmed American trade with other countries and the American cultivation of our farms and the exploitation of our seas.
This forced the government's hand, and they had to turn to debt once again to oppose the trade dispute. This debt once again placed The Country into a situation of managing mass inflation.
To address this issue, James Madison had to revive the central bank to manage the country's debt once again and reduce the amount of inflation within the circulation of the economy. (“History of the Federal Reserve”)
(“War of 1812 | History, Summary, Causes, Effects, Timeline, Facts, & Significance | Britannica”)
During the period between the previous central bank and the modern central bank as we know it today, the country lived through a period known as "Free Banking." ("Federal Reserve History”)
However, this would be short-lived as it was becoming more common for nationwide bank failures and bank runs.
This concerned Wall Street at the time and they invoked the help of J.P. Morgan.
Morgan partnered with the failing banks to provide much-needed liquidity to prevent these institutions from collapsing due to concerns withdrawing their deposits due to the eroding trust in the banking system. (“J. Pierpont Morgan | Federal Reserve History”)
Morgan, President Wilson, and his colleagues felt that a new central bank was necessary to prevent multiple bank panics and permanent damage to our financial system. (“Mhp: The World Order -- The Business of America”)
(JP-Morgan-1)
The Great Depression was the most challenging crisis the central bank had to face.
The Great Depression practically defined the role of The Federal Reserve for years to come.
Since the modern central bank was new, and this crisis was unique, the bank did not know how to handle a downturn properly.
Experts today can not fully understand what caused The Great Depression, but we know that The Great Depression was prolonged due to severe deflation.
The Federal Reserve's response to the issue was not the most favorable. They actively restricted the funds and liquidity available to the banks, encouraging more inflation.
This caused more bank failures, reduced credit access for business, and massive job loss leading to severe economic consequences.
These effects were felt throughout the country until we were well into World War II. (Richardson)
Shortly after WWII, the United States economy was thrown into another economic challenge. However, instead of massive deflation, we were faced with runaway inflation. This was caused by several issues such as an energy crisis, price and wage controls, and a failure to change economic philosophy.
These crises led to The Federal Reserve Board to steer away from its old philosophy of Keynesian Economics and adopted a new philosophy known as Monetarism. This philosophy encouraged policy changes to reduce the money supply in the economy in order to restrict the issues of inflation.
Once again, this is an example of The central bank correct an economic issue for The United States and preventing the inflation crisis from becoming a hyperinflation crisis. (Bryan)
After solving The Great Inflation issue, The Federal Reserve had equipped itself with the tools to aid the country into the most significant expansion in modern-day history.
To start, The Federal Reserve had adopted new tools to ensure that major banks were equipped with the proper liquidity to extend credit to businesses to create new jobs and services. These banks were able to take on risks, which led to the boom of Dotcom businesses in the 90s. Despite the bust of the bubble, The Federal Reserve was able to manage the fallout of that crisis and returned the country to prosperity.
During this time, we also saw a decrease in the margin rate, which resulted in lower interest rates, which prompted government policy to encourage Americans to become first time homeowners. The Federal Reserve had also decided to support the mortgage market by selectively purchasing mortgage backed securities to continue to increase liquidity for home loans.
The Federal Reserve also navigated the United States through two challenging setbacks, which caused economic downturns. This was the September 11 attacks and The Great Recession of 2008. In both of these events, The Federal Reserve continued to use its tools to purchase securities and encourage banks to continue to lend by supplying liquidity to these institutions. (“History of the Federal Reserve”)
“History of the Federal Reserve.” Federalreserveeducation.Org, 2020, www.federalreserveeducation.org/about-the-fed/history. Accessed 16 Oct. 2020.
“Mhp: The World Order -- The Business of America.” Modernhistoryproject.Org, 2020, modernhistoryproject.org/mhp?Article=WorldOrder&C=4.0. Accessed 16 Oct. 2020.
“J. Pierpont Morgan | Federal Reserve History.” Federalreservehistory.Org, 2020, www.federalreservehistory.org/people/j_pierpont_morgan. Accessed 16 Oct. 2020.
Richardson, Gary. “The Great Depression | Federal Reserve History.” Federalreservehistory.Org, 2013, www.federalreservehistory.org/essays/great_depression. Accessed 16 Oct. 2020.
Bryan, Michael. “The Great Inflation | Federal Reserve History.” Federalreservehistory.Org, 2011, www.federalreservehistory.org/essays/great_inflation. Accessed 16 Oct. 2020.
Bryan, Michael. “The Great Inflation | Federal Reserve History.” Federalreservehistory.Org, 2011, www.federalreservehistory.org/essays/great_inflation. Accessed 16 Oct. 2020.
“Federal Reserve Board - Photo Gallery.” EC_8 2011 Federalreserve.Gov, 2020, www.federalreserve.gov/photogallery.htm. Accessed 16 Oct. 2020.
“Federal Reserve Board - Photo Gallery.” BDM_ALL_cent_grp_121613__0518_02819 2013 Federalreserve.Gov, 2020, www.federalreserve.gov/photogallery.htm. Accessed 16 Oct. 2020.
Staff Writer. “Bold Leader Spotlight: John Pierpont ‘JP’ Morgan.” JP-Morgan-1 Bold Business, Bold Business, 19 Apr. 2019, www.boldbusiness.com/human-achievement/bold-leader-jp-morgan/. Accessed 16 Oct. 2020.
The Great Recession was largely caused by an excess of liquidity and the pressure to create risker loans. These loans were extended to consumers who were interested in home mortgages but were not vetted correctly to ensure they qualified for these loans. As a result, these caused massed defaults in home mortgages.
These mortgage securities were bought by investors to reap the benefits of the interest collected. However, when the homeowner defaulted on the loan, the investor had lost their entire investment for that mortgage. This was a continuous cycle until the whole housing market collapsed, bringing the rest of the economy into a downturn.
As a response, The Federal Reserve had aided the United States Congress by enacting two stimulus packages and a package to bail out banks to prevent bank failures that would have rivaled the failures of the 1900s. They also introduced a new tool known as Quantitative easing, which allowed the reserve to purchase additional securities to allow the stock market to thrive and not be drawn down by bad investments. These decisions allowed the economy to recover back to prosperity slowly. (“History of the Federal Reserve”)
Throughout the previous slides, I hope everyone was able to see a pattern. Whenever the United States was on the brink of economic collapse, it relied on The Federal Reserve to help manage and reduce the effects of financial crises.
The role of The Federal Reserve is more vital now than ever before. As Congress continues to debate the state of additional stimulus to assist hurting Americans affected by COVID-19, funds for hospitals and testing, funding for families who are at risk for losing their homes, and funding to help with distributing a vaccine, the Federal Reserve is quite aware of the economic issues. It has been hard at work to mitigate them as much as possible.
The Federal Government has recently passed trillions of dollars in stimulus. Much of these funds aided programs such as the paycheck protection program, The Main Street Lending program, EDIL emergency loans and grants, unemployment benefits, and direct payments to families and citizens. The government did not have cash in reserves to fund these programs and could not raise taxes as it would push the economy into a deeper recession. However, thanks to the tools at The Federal Reserve's disposal, they were able to purchase the bonds The Federal Treasury needed to sell to fund these programs.
The Federal Reserve continues to advocate to Congress on the behalf of American Citizens to prevent the economic damage caused by COVID-19 from worsening. They have proven repeatedly that they rose to the occasion during America's most trying times and are here willing and able to help again during these trying times.