The Federal Reserve System is the central banking system of the United States, created in accordance with the Federal Reserve Act of 1913 passed by the U.S. Congress to avoid the banking crisis similar to that of 1907.

Federal Reserve System (referred to as Fed ) is the U.S. Central Bank system. It was created based on the 1913 Federal Reserve Act passed by U.S. Congress to avoid the banking crisis similar to 1907 again. The entire system includes Federal Reserve , Federal Open Market Committee , Federal Reserve , 3,000 members banks and 3 Advisory Councils. Headquartered in , Washington, DC, .

History

The earliest institutions in the United States with central bank functions were the First Bank of the United States and the Second Bank of the United States approved in 1791. In the era of free banking between 1837 and 1862, there was no formal central bank in the United States, and from 1862 to 1913, a private national banking system (J.P. Morgan ) exercised this function. The Federal Reserve was established by the U.S. Congress on the basis of the passage of the Owen-Glass Act (also known as the Federal Reserve Act) and signed by President Woodrow Wilson on December 23, 1913.

US First Bank

1791-1811-Treasury Secretary Alexander Hamilton (Alexander Hamilton) submitted an ambitious plan to Congress, outlining his ideas on establishing a national bank, all the basis comes from Bank of England . He believes that the US version of the bank can issue paper money, assist in the custody of public funds, and provide commercial transactions as government agents, including assisting the government in collecting taxes and repaying government debts.

Thomas Jefferson is worried that the move will create a government monopoly, making the country more inclined to financiers and businessmen than agricultural planters and family farmers. The establishment of such an institution conflicted with the society advocated by Thomas Jefferson that the United States should be based on agricultural society rather than banking, commerce and industry. After a long period of fierce debate in the Senate and the House of Representatives, Hamilton's bill was signed and implemented in February 1791 by President George Washington. The registered capital is $10 million, of which $2 million is held by the federal government and $8 million is held by private investors.

US Second Bank

1816-1841-The war with Britain undermined the US foreign trade. Britain used its powerful navy to block the United States' foreign waters, causing American exporters to go abroad to be blocked, and fishermen's fishing was threatened. The corresponding federal government revenue continued to decline. By 1815, the United States was already heavily in debt, and a large amount of war debt to be repaid was testing the country's leaders. At this time (January 1814), Congress received a petition from 150 New York merchants to call for the establishment of the National Second Bank, but the opposition remained high. By April 1814, President James Madison's attitude began to change subtly, and he admitted that it was indeed necessary to set up a new bank to deal with the war with Britain. But peaceful negotiations with Britain prompted James Madison to withdraw his previous comments about setting up a new bank.

1815, the federal government reached a peace agreement with the United Kingdom, and Congress rejected the resolution to establish a new bank. However, the government's economic situation continued to deteriorate, and many state charter banks were unable to redeem their notes, forcing Madison and his advisers to believe in the greater importance of currency. Alexander J. Dallas once again called for the establishment of a new National Bank in his annual report, and after intense debate, President Madison finally signed a bill in April 1816 to agree to the establishment of a National Bank. The registered capital of the second bank is $35 million. It should be noted that stocks have started to be sold in 20 cities across the United States. Three weeks later, there are still $3 million in stocks that are not purchased, so Stephen Gillard, a banker in Philadelphia , bought all the remaining ones.There are six people who play a key role in establishing the National Second Bank, namely financiers John Jacob Astor , David Parish, Stephen Gillard and Jacob Barker; Alexander J. Dallas (who later became the U.S. Treasury Secretary) and South Carolina Rep. John C. Calhoun.

Banking crisis in the gold rush era

1863–1913-end the 19th century, but at the same time, the crisis accompanied these banking industries. At this time, New York had become the financial center of the United States. During the period from 1863 to 1913, there were as many as 8 banking crises in Manhattan . At the beginning of the crisis, it was only in New York and its surrounding cities and states, and then it quickly spread throughout the United States. The regional banking crisis in 1886 continued to break out in the Midwest states such as Illinois , Minnesota and Wisconsin . In 1903, Pennsylvania and Maryland also broke out in banking crises one after another. This crisis not only caused a large number of bank runs in the banking industry, but also destroyed the national banking and payment systems. As the panic crisis intensified, eventually the political leaders of the financial and federal government began to consider reforming the monetary system and establishing the Federal Reserve.

The banking crisis began with excessive investment in railways. The U.S. rail industry grew rapidly in the 19th century, and early investors of many projects received high returns. With the advent of the gold rush era, the high investment rate in railways is still intensifying, but the demand for new projects has obviously exceeded the demand for capacity , so the return on railway investment has begun to decline sharply. By May-September 1873, the Austrian stock market collapsed, prompting European investors to withdraw all holdings of U.S. securities (especially railway bonds). As Europeans divestment lowered the market, reduced the value of stocks and bonds, and caused railway companies to encounter difficulties in financing, without cash to pay for operations and refinancing, many railway companies went bankrupt, a crisis that forced the famous commercial bank Jay Cooke and CO to bankrupt. At least 100 banks went bankrupt nationwide. The banking crisis in 1893 was one of the worst in American history, and the crisis began in the domestic banking industry in the United States.

1907 Global Financial Crisis

1907 - The first global financial crisis directly prompted the federal government to establish the Federal Reserve system later, prompting monetary reform. Moen and Tallman believe that the 1907 financial crisis fundamentally changed the New York Bill Exchange and the Central Bank's perception of the value of bill trading, because the panic caused by the financial crisis mainly occurred in trust companies and other institutions. Trust companies in New York are state intermediaries that compete with banks, mainly for customer deposits. However, trusts are not the core part of the payment system, and the settlement volume of checks is relatively low compared to banks. The result is that their cash reserves are relatively low, about 5%, while the National Bank's cash reserves are 25%. Since the trust company's deposit accounts require cash, the trust is as shocked by the deposits as banks. When we look back at the 1907 financial crisis, it is found that the 1907 crisis has many similarities with the 2007-2009 financial crisis, both of which start with financial institutions and markets in New York, and both affect the economies of the United States and other parts of the world.

1907's trust companies are similar to the shadow banking role of the financial crisis of 2007-2009. Short-term loans during the crisis mainly come from some shadow banks ( hedge fund and money market mutual fund ), while providing funds for other shadow banks ( investment bank ). As the main liquidity fund provider of in the repurchase agreement, these shadow banks actually play the role of “depositors”, providing funds for loans, allowing investment banks to refinance the securities market, just as unsecured loans (overdrafts) of trust companies allow brokers to buy stocks. Both trusts and shadow banks are at risk of depositor runs, so when the crisis arises, loan funds from the short-term credit market have to be withdrawn.

The bailout of Bear Stearns in 2008 was hit by a run by shadow banks and lenders, and then JPMorgan Chase (JPMorgan Chase) acquired Bear Stearns with a loan from the Federal Reserve. Lehman Brothers went bankrupt in September 2008, while Knickerbocker Trust suspended its rights in October 1907. Despite this, there were significant differences between Nickel Bock Trust and Lehman Brothers, who were in a state of suspension at the time, while Lehman Brothers failed. Nickel Bock prevented depositors from obtaining deposits through a "temporary closure", and he reopened in March 1908 after $2.4 million was injected into Nickel Bock. In contrast, Lehman Brothers' remaining products have been acquired by multiple companies around the world. Lehman Brothers' customers need to wait 6 years to get the payment, while the net loss of Lehman creditors is not included.

The "panic crisis" in trust companies heralds the beginning of the panic crisis in the entire financial system. At the beginning of the crisis, the public tried to increase holdings of more current assets as supplements rather than as deposits, forcing the " credit crunch " between institutions such as intermediaries. The panic crisis in 1907 prompted the federal government to establish the Federal Reserve system, Federal Deposit Insurance Company or the Securities and Exchange Commission, which aim to bring stability to banks and financial markets. Before these institutions emerged, the National Banking Law stipulated that the daily management of banks would be guided, including supervision, especially the most closely linked banks of large scale. However, the bill does not provide any guidance on the withdrawal of large-scale deposits in the event of a panic crisis. Therefore, increasing research on early crises can effectively understand the principles of financial crises so that crises can be prevented and avoided.

Ben Bernanke (Ben Bernanke) published a pioneering paper on the link between credit crisis and actual economic results during his tenure at . There has been some controversy about this important research topic. A lesson learned from a comparison of the financial crisis in 1907 and 2008, that short-term credit market volatility may be the catalyst for the beginning of a panic crisis. The crisis in 1907 had many practical effects afterwards, such as the industrial output value of decreased by 17% in 1908, and the actual GDP of decreased by 12%, second only to the seriousness and destructiveness brought by the Great Depression. But unlike the Great Depression, the physical industry quickly recovered after 1908.