The Federal Reserve: A Unique Institution

Abstract

The American Central Bank was established in 1913, much later than its sister organizations in Europe and Japan. It took a dangerous financial crisis, resolved only when J.P. Morgan arranged a bail-out fund, to establish a central bank. The Federal Reserve Act was a compromise between supporters and detractors, which accounts for its decentralized structure. Arriving late on the scene, the Fed benefitted from the advantage of the latecomer, thereby avoiding some flaws that existed at other central banks. But it lacked a clear objective, the Act merely requiring the Fed to maintain an elastic currency. To some it implied conducting monetary policy, others concluded that it only allowed for seasonal fluctuations in the issuance of banknotes. The central banks’ independence was curtailed in its early years by the US Treasury. The result was unproductive friction between the Fed and the Treasury in the early years of the central bank’s existence. In later years, these flaws were largely removed.