THE FED'S INDEPENDENCE
The Federal Reserve System, often called "the Fed," is the central bank of the United States and one of the most influential financial institutions in the world. It was established in 1913 by the Federal Reserve Act in response to recurring financial panics, with the goal of providing the country with a safe, flexible, and stable monetary and financial system.
When the Fed was founded in 1913, most other major economies already had central banks, some with centuries of history. The U.S. was the last major financial power of its era to establish a permanent central bank, having previously relied on two short-lived central banks in the late 18th and early 19th centuries, and then a patchwork of banking systems. The creation of the Fed was influenced by the experiences and structures of European central banks, particularly those in Britain and Germany.
The U.S. had a long-standing suspicion of centralized financial authority. Early central banks—the First Bank of the United States (1791–1811) and the Second Bank of the United States (1817–1836)—were controversial and faced strong opposition from those who believed they concentrated too much power in the hands of a few, especially wealthy investors and the federal government.
Influential figures like President Andrew Jackson argued that central banks were monopolistic and undemocratic, leading to the veto and eventual demise of the Second Bank in 1836. This ushered in the "free banking" era, during which the U.S. had no central bank and relied on a decentralized, state-chartered banking system.
The U.S. was marked by deep regional differences, with states and local banks wary of federal control over money and credit. Many Americans, especially in the South and West, feared that a central bank would favor the financial interests of the Northeast and undermine local autonomy. These divisions made it politically difficult to create a lasting central bank, unlike in more centralized European countries.
When the Federal Reserve was finally established, its structure was designed as a compromise: a decentralized system of 12 regional banks overseen by a central board in Washington, D.C. This reflected ongoing concerns about concentrated power and was intended to balance regional interests.
The Banking Act of 1935 was a landmark reform that fundamentally changed the structure and governance of the Federal Reserve System. The Act shifted significant authority from the 12 regional Federal Reserve Banks to a newly reconstituted Board of Governors in Washington, D.C., making the system more centralized and cohesive. The Federal Reserve Board was renamed the Board of Governors, expanded to seven members, each appointed by the President for 14-year terms. This increased the Board's independence and centralized control over monetary policy. The Act established the FOMC as a separate legal entity. The Secretary of the Treasury and the Comptroller of the Currency were removed from the Fed’s governing board, further increasing the Fed’s autonomy from the executive branch. The Act also made the Federal Deposit Insurance Corporation (FDIC) permanent.
The current structure of the Federal Reserve is largely the result of decisions made by Congress at its creation in 1913 and further changes enacted through the reforms of 1935.
INDEPENDENCE
The Federal Reserve is designed to operate as an independent central bank within the U.S. government structure. This means it has the authority to set monetary policy—such as adjusting interest rates—without direct interference from the president, Congress, or other political actors, even if those decisions are unpopular with elected officials.
Independence does not mean that the Fed is completely autonomous or free from accountability.
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