Why Congress Created the Federal Reserve
EducationWhy Congress Created the Federal Reserve
The Federal Reserve was created by an act of Congress back in 1913. The act is known as The Federal Reserve Act and in its first sentence is the reason why the Federal Reserve was created.
The First Line of the Federal Reserve Act Reads
"An Act To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."
The key words in the phrase are: to furnish an elastic currency.
Image Source (Federal Reserve Building in Washington, DC)
The Federal Reserve Can Print Money
The Federal Reserve was given the ability to print money. The Fed was given that ability so that it could make sure the currency or money in the United States economy would always be elastic. The Federal Reserve can release money into the United States economy anytime it wants to by simply printing money out of thin air and then using that money to purchase assets or really anything it wants to in the economy.
The Federal Reserve Controls the Amount of Money in Circulation
When the Federal Reserve makes a purchase with newly printed money it has effectively released money into the economy. The Federal Reserve can also withdraw money from the economy by selling assets. When the assets are sold the purchasers pay for them with money which goes to the Federal Reserve and is no longer part of the public money supply. But the Federal Reserve was not created to withdraw money from the economy it was created to add money to the economy when needed to furnish an elastic currency.
The Federal Reserve Was Created to Prevent Recessions
When economic conditions are tough money is lost from the economy as banks write-off bad loans. As the banks write-off loans the amount of money shrinks. As money in circulation shrinks the money still in circulation appreciates and becomes more valuable and people become reluctant to spend or borrow money and the economy stops growing and contracts and goes into recession. Prior to the creation of the Federal Reserve when money was lost from the economy there was no artificial way to replace the lost money and hard times would ensue with higher unemployment and negative economic growth.
By creating the Federal Reserve Congress created a way to replace any money lost in the economy - a way to keep an elastic currency. Replacing the lost money would prevent money from appreciating in value and without the appreciation people would continue to spend and borrow money at normal levels and economic growth would not have to contract and recess.
Congress created the Federal Reserve to try and prevent any appreciation in money from occurring because appreciation in money causes people to spend and borrow money at reduced levels which destroys economic growth and jobs.
Congress created the Federal Reserve to furnish an elastic currency in the United States economy which would prevent recessions from occurring.
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Sources: http://www.llsdc.org/attachments/files/105/FRA-LH-PL63-43.pdf