dec 23, 1913 - Federal Reserve Act


National bank currency was considered inelastic because it was based on the fluctuating value of U.S. Treasury bonds rather than the growing desire for easy credit. If Treasury bond prices declined, a national bank had to reduce the amount of currency it had in circulation by either refusing to make new loans or by calling in loans it had made already. The related liquidity problem was largely caused by an immobile, pyramidal reserve system, in which nationally chartered rural/agriculture-based banks were required to set aside their reserves in federal reserve city banks, which in turn were required to have reserves in central city banks. During the planting seasons, rural banks would exploit their reserves to finance full plantings, and during the harvest seasons they would use profits from loan interest payments to restore and grow their reserves. A national bank whose reserves were being drained would replace its reserves by selling stocks and bonds, by borrowing from a clearing house or by calling in loans. As there was little in the way of deposit insurance, if a bank was rumored to be having liquidity problems then this might cause many people to remove their funds from the bank. Because of the crescendo effect of banks which lent more than their assets could cover, during the last quarter of the 19th century and the beginning of the 20th century, the United States economy went through a series of financial panics.


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dec 23, 1913
~ 104 years ago


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