Working Paper

On the Origins of the Federal Reserve System and Its Structure

Abstract: The creation of the Federal Reserve System ultimately stemmed from fundamental changes in the banking industry that heightened the risks associated with shifts in the public’s liquidity preferences and that created an atmosphere of distrust between the small, traditional, country banks and the large, transforming, Wall Street banks. The severity of the Panic of 1907 became the proximate factor in the Federal Reserve’s formation. The panic, which the New York Clearing House’s slow, discriminative, and insufficient response characterized, gave credence to concerns of growing financial risks and invigorated calls for reform. The Federal Reserve’s unique structure reflects compromises reached in attempts to dampen the risks in the banking industry while easing the distrust and fears of dominance among its various stakeholders.

Keywords: Inelastic/Elastic Currency; New York Clearing House; Reserve pyramiding; Panic of 1907; Aldrich Plan; Federal Reserve Act; Reserve Bank Organization Committee;

JEL Classification: E58; N20;

https://doi.org/10.26509/frbc-wp-202317

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2023-08-02

Number: 23-17