Money, Banking & The Federal Reserve: A Brief History Prepared by Lauren Woodliff for

: U.S. Currency To finance the American Revolution Continental Congress printed the new nation's first paper money. Known as "continentals," Over production led to inflation

: First Attempt at Central Banking Congress established the First Bank of the United States, headquartered in Philadelphia, in Largest corporation in the country Dominated by big banking and money interests. Made some Americans uncomfortable and only lasted 20 years.

: A Second Try Fails Political climate was once again inclined toward the idea of a central bank. Congress charters the Second Bank of the United States. Again, only lasted 20 years.

: The Free Banking Era State-Chartered Banks & unchartered “free banks” Issued their own ‘notes’.

1863: National Banking Act Passed during the Civil War Required taxation on state bank notes Effectively created a uniform currency for the nation.

: Financial Panics Financial panic plagues economy. Growing consensus that a central banking authority was needed to ensure a healthy system and an elastic currency.

1913: The Federal Reserve System is Born In December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise—a decentralized central bank that balanced the competing interests of private banks and populist sentiment.

1914: Open for Business November 16, cities chosen as sites for regional Reserve Banks were open for business, just as hostilities in Europe erupted into World War I.

1920s: The Beginning of Open Market Operations Open market operations as a monetary policy tool Promoting relations with other central banks, especially the Bank of England elevated the stature of the Fed.

: The Market Crash and the Great Depression Warnings that stock market speculation would lead to dire consequences realized. October 1929, the stock market crashed and the nation fell into the worst depression in its history. Blamed speculative lending and inadequate understanding of monetary economics and policies.

1933: The Depression Aftermath Congress passed the Banking Act of 1933 Separation of commercial and investment banking. Required use of government securities as collateral for Federal Reserve notes Established the Federal Deposit Insurance Corporation (FDIC). Required bank holding companies to be examined by the Fed.

More Changes.. The Banking Act of 1935 Amendments Creation of the Federal Open Market Committee (FOMC) The Employment Act follow WWII added maximizing employment responsibilities Bank Holding Act of increased regulations for bank holding companies

1970s: Inflation The 1970s saw inflation skyrocket as producer and consumer prices rose, oil prices soared and the federal deficit more than doubled.

1980s: Deflation & Financial Modernization The Monetary Control Act of 1980 required the Fed to price its financial services competitively against private sector providers and to establish reserve requirements for all eligible financial institutions. Marked the beginning of a period of modern banking industry reforms

1990s: The Longest Economic Expansion Banks offer a menu of financial services, including investment banking and insurance. The decade was marked by generally declining inflation and the longest peacetime economic expansion in our country’s history.

After the 90’s The effectiveness of the Federal Reserve as a central bank was put to the test on September 11, 2001 as the terrorist attacks on New York, Washington and Pennsylvania disrupted U.S. financial markets.

9/11/01: Fed issued this statement “The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.”

The Recovery In the days that followed, the Fed lowered interest rates and loaned more that $45 billion to financial institutions in order to provide stability to the U.S. economy. By the end of September, Fed lending had returned to pre- September 11 levels The Fed played the pivotal role in dampening the effects of the September 11 attacks on U.S. financial markets.

After September 11, 2001 In the days that followed, the Fed lowered interest rates and loaned more that $45 billion to financial institutions in order to provide stability to the U.S. economy. By the end of September, Fed lending had returned to pre- September 11 levels The Fed played the pivotal role in dampening the effects of the September 11 attacks on U.S. financial markets.

January 2003: Discount Window Operation Changes Federal Reserve changed its discount window operations Rates at the window set above the prevailing Fed Funds rate Provided rationing of loans to banks through interest rates.

2006 and Beyond: Financial Crisis During the early 2000s, low mortgage rates and expanded access to credit made homeownership possible for more people, increasing the demand for housing and driving up house prices. Securitization of riskier mortgages expanded rapidly, including sub- prime mortgages made to borrowers with poor credit records. House prices faltered in early 2006 and then started a steep slide, along with home sales and construction. Falling house prices meant that some homeowners owed more on their mortgages than their homes were worth.

2007: A crisis point Fears about the financial health of other firms led to massive disruptions in the wholesale bank lending market. Rates on short-term loans rose sharply relative to the overnight federal funds rate. The rising number of delinquencies on sub-prime mortgages was a wake-up call to lenders and investors that many residential mortgages were not nearly as safe as once believed. As the mortgage meltdown intensified, expected losses rose dramatically. Losses spread across the globe.

2008: Outlook No Less Grim In the fall of 2008, two large financial institutions failed: the investment bank Lehman Brothers and the savings and loan Washington Mutual. The extensive web of connections among major financial institutions meant that the failure of one could start a cascade of losses throughout the financial system. Confidence in the financial sector collapsed and stock prices of financial institutions around the world plummeted

Ripple Effect Banks and investors clamped on loans. Tightened standards and higher interest rates—a classic credit crunch. Tight credit weakened spending on items financed by borrowing: houses, cars, and business investment. Households cut back on spending, affecting the supply and demand of the economy. Demand weakened, businesses canceled expansion plans and laid off workers.

Sad But True The U.S. economy entered a recession, a period in which the level of economic activity was shrinking, in December The recession had been relatively mild until the fall of 2008 when financial panic intensified, causing job losses to soar.