Making Sense of the Federal Reserve

History and Purpose of the Federal Reserve

A mob of people attempt to withdraw deposits from a bank.

Before the Federal Reserve was founded, the nation was plagued with financial crises. At times, these crises led to "panics" in which people raced to their banks to withdraw their deposits. The failure of one bank often had a domino effect, in which customers of other banks rushed to withdraw funds from their own banks even if those banks were not in danger of failing. Banks needed a source of emergency reserves to prevent the panics and resulting runs from driving them out of business.

What led to the creation of the Federal Reserve? A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. The Federal Reserve System was initially created to address these banking panics. It is now charged with several broader responsibilities, including fostering a sound banking system and a healthy economy.

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