The Federal Reserve was created to provide oversight for an economic system that has been long neglected. I still stand by that but will elaborate why the system in place works out.
The Federal Reserve system is a “Central Banking system of the US”. (Chen) The FED was created to serve 5 pivotal functions. They are there to conduct, (monetary policy, regulate the banks, monitor, and protect the credit rights of the consumer, maintain stability of the financial system, and provide financial services to the US Government.) (Chen) It also has serves 3 primary purposes, (Maximum employment, stable prices, and longtime interest rates) (Chen) It is the overseer of the US economy. The Panel that provides oversight is a Central board appointed by the President (an example is Jerome Powell who was appointed by Pres. Trump and then reappointed by Pres. Biden). The Chairman oversees the central board that consists of 12 regional banks. (Foner)
Before this system was brought in, the US had formed centralized national banks that were controlled by eastern banking powers. (Chen2) The banks were unreliable and took over, by issuing their own currency backed by gold. (Chen2)
The US attempted to remedy this by passing the “National Banking Act” in 1863. It would allow charted banks nationally to provide a standardized currency backed the United States. (Chen2) However, despite these attempts, oversight was still lacking in the overall financial institutions.
With the crashes of 1893 and 1907 accompanied by the bailout provided by JP Morgan, it was apparent that new replacement would be much needed. In 1912 Pres. Wilson asked the House committee on Banking and Finance to offer a new solution to the banking issues. (Chen2) Committee laid the groundwork with what we have now today. It would also add the “Federal Trade Commission” in 1914. This would also aid the FED in its situations. (Foner) The FTC was created to target, investigate, and prohibit business activities, such as “Price gouging”, and monopolistic practices”. (Foner)
These two important processes gave the country the ability to control its own market while protecting the best interests of the consumers. It was a historical moment as for that, there was really no true oversight on how the economy, or banks were operating.
With that said there some moments where the FED failed to do what was created to do and I will cover those.
When the Stock Market crashed in 1929 it would the trigger that set moments into motion that would later become the “Great Depression. “The FED in this case could have stepped in and perhaps committed more to stopping this. When the banking system began to collapse, the money supply fell and began to deflate. (FRH) The deflation would cause debts to increase and make it harder to pay. (FRH) What the Fed could have done was to an expansion of the monetary base, but it failed to do so for several reasons. (FRH) It was an unprecedented event, but it wasn’t entirely based off of ignorance. The FED was still growing and evolving in its role, and perhaps didn’t have the necessary tools that they do today to have acted sooner. However, some in the Fed felt that defending the “Gold Standard” was the most important thing and opted to raise interest rates and reduce the supply of money instead of helping the banks. (FRH) When did attempt to expand the money supply by 1931 the expansion was minute and unable to counter the depression. (FRH) I think the FED’s inactiveness was a bigger factor than anything Hoover could have done.
Another moment that the FED failed was during the 1970’s during what was referred to as “Stagflation“. The actual period of this inflation I am discussing actually was much longer period (1965 to 1982). (FRH2) During this time President Johnson’s Great Society program brought about major spending programs across a broad array of social initiatives at a time when the US fiscal situation was already being strained by the Vietnam War. (FRH2) The FED would attempt what was called an “even keel” approach this the monetary imbalance it was encountering by not changing policy and maintaining low interest rate. (FRH2) To make matters worse as the 70s began the economy would be hammered by the energy crises in Oct 1973 and the second one in 1979. (FRH2) While the Fed couldn’t control the oil market, the rise in the unemployment was something that the FED could control. The Fed attempted to do this by accommodating large and rising fiscal imbalances and leaned against the headwinds produced by energy costs. These policies accelerated the expansion of the money supply and raised overall prices without reducing unemployment. (FRH2) The FED sadly wouldn’t be able to address this until 1981.
By the Summer of 1980 Inflation had reached 14.5% and unemployment had reached 7.5%. (FRH2) New FED Chairman Paul Volcker attempted a Hail Mary to pull the country out of its inflation issue. What Volcker would do was to raise the interest rate in an attempt to slow spending and the economy essentially to force inflation downward. He wouldn’t be the first to do it, but his rises exceeded where his predecessors had gone. He would raise the interest rates 20% which would trigger the recession that lasted from 1981-82. Inflation would begin to drop and would reach 5% by the end of the recession. (FRH). While it was successful, it still raised questions as to why his predecessors were unable to accomplish this sooner. Unfortunately, there were several reasons, and it became clear that political influence was the biggest one.
FRH2 The Great Inflation | Federal Reserve History
FRH The Great Depression | Federal Reserve History
Foner Foner, E., DuVal, K., & McGirr, L. (2023a). Give me liberty! An American history (7th ed., Vol. 2). W.W. Norton and Company.
Justin Chen https://www.investopedia.com/terms/f/federalreservesystem.asp
Throughtful Reader 
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