Traverse City Record-Eagle

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December 24, 2013

The Fed turns 100 years old

WASHINGTON (AP) — The press called it an early Christmas present for President Woodrow Wilson: On Dec. 23, 1913, Congress passed legislation creating the Federal Reserve. Hours later, Wilson signed the Federal Reserve Act into law.

No one at the White House ceremony that day could foresee what the Fed has become: A titanic institution with power over people and economies worldwide. Its actions shape loan rates and job growth. They affect trade, stock prices, bank rules, financial systems. Economic decisions are made with the Fed in mind. Retirement savings hinge on its policies.

“If Woodrow Wilson and the other architects of the Federal Reserve could have known how powerful it would become, they would have been shocked,” said Sung Won Sohn, an economics professor at California State University Channel Islands. “There is no part of the global economy today which is not affected by actions of the Federal Reserve.”

Supporters of the 1913 bill were responding to a spate of banking panics. Depositor runs were causing bank failures. Recessions often followed. An especially severe panic struck in 1907. Without a central bank, financier J.P. Morgan had to intervene to save the financial system.

Five years ago, when the financial meltdown struck, the Fed expanded its reach. Its response to the worst such crisis since the 1930s was to ease credit, print money and boost confidence.

“If you are a central banker with the power to print money and the willingness to use that power, it gets the attention of financial markets,” said David Jones, author of a forthcoming history of the Fed. “The Fed has grown into this colossus which is basically a fourth branch of government.”

When the Fed was created, the “discount window” was its main tool. When commercial banks in the Fed system fell short of money, they could borrow from one of 12 regional Fed banks. This became a vital Fed role: Lender of last resort.

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