Signed December 23, 1913

The Federal Reserve Act

How America Got a Central Bank, and What It Means for Democratic Accountability

Signed into law two days before Christmas 1913, the Federal Reserve Act created the most powerful unelected institution in American governance. Conceived in secret by a handful of bankers and politicians, the Fed controls the money supply, sets interest rates, and shapes the economic reality of every American, all with a degree of independence that places it largely beyond democratic accountability.

The Jekyll Island Meeting

In November 1910, a small group of the most powerful men in American finance secretly boarded a private railcar in New Jersey, bound for the Jekyll Island Club off the coast of Georgia. The group included Senator Nelson Aldrich (whose daughter married John D. Rockefeller Jr.), several Wall Street bankers, and a Treasury Department official. They used first names only and told anyone who asked they were going duck hunting. [3]

Over nine days, this group drafted what became the Aldrich Plan, the framework for a central banking system. The plan was designed to address the recurring financial panics that had plagued the United States, most recently the devastating Panic of 1907, when J.P. Morgan had personally organized a private bailout of the banking system. The consensus among financial elites was that the country needed a "lender of last resort," a central authority that could inject liquidity into the system during crises. [3] [6]

The Aldrich Plan was too closely associated with Wall Street to pass a Democratic Congress. But its intellectual framework survived. Congressman Carter Glass and Senator Robert Owen reworked the plan, adding provisions for presidential appointment of the central board and creating the twelve regional Federal Reserve Banks as a concession to populist distrust of Eastern financial power. President Wilson signed the Federal Reserve Act on December 23, 1913. [1] [6]

The Secrecy Question

The Jekyll Island meeting was not publicly acknowledged for decades. Forbes magazine publisher B.C. Forbes first revealed it in 1916, but the participants denied it until the 1930s. The secrecy was not incidental; the participants knew that public knowledge of Wall Street bankers drafting the nation's banking legislation would have been politically toxic.

Structure and Power

The Federal Reserve System is unlike any other government institution. It consists of twelve regional Federal Reserve Banks (technically private corporations owned by their member banks), overseen by a Board of Governors in Washington appointed by the president and confirmed by the Senate. The Federal Open Market Committee (FOMC), which sets monetary policy, includes both Board members and regional bank presidents. [1] [2]

The Fed's powers are vast. It sets the federal funds rate, which influences interest rates across the entire economy, from mortgages to credit cards to business loans. It controls the money supply through open market operations. It supervises and regulates banks. Since the 2008 financial crisis, it has also engaged in "quantitative easing," purchasing trillions of dollars in government bonds and mortgage-backed securities, effectively creating money to inject into the financial system. [2]

These powers directly affect every American's economic life. When the Fed raises rates, mortgages become more expensive, businesses slow hiring, and asset prices fall. When it lowers rates or prints money, inflation can erode savings and purchasing power. The Fed's decisions about how much money exists in the economy and what it costs to borrow shape wages, prices, employment, and wealth distribution. [4]

The Accountability Gap

The Fed operates with a degree of independence that is unique among government institutions. Board Governors serve 14-year terms, longer than any elected official. The Fed funds itself from its own operations rather than congressional appropriations, removing the most basic lever of legislative oversight. Its monetary policy deliberations are conducted in private, with transcripts released only after a five-year delay. [5]

This independence was designed to insulate monetary policy from short-term political pressures, the fear being that politicians would always push for loose money and low rates to boost the economy before elections. Allan Meltzer's monumental three-volume history of the Fed documents how this independence has been both a strength (allowing the Volcker Fed to crush inflation in the early 1980s) and a weakness (enabling policies that contributed to asset bubbles and growing inequality). [2]

The "Audit the Fed" movement, supported by figures across the political spectrum, argues that the Fed's independence has become excessive, that an institution making decisions of this magnitude should face real transparency and accountability. The Congressional Research Service has documented the tension between Fed independence and the constitutional principle that the people's representatives should control the nation's purse strings. [5]

The Fed's Balance Sheet

Before the 2008 crisis, the Fed's balance sheet was approximately $900 billion. By 2022, it had ballooned to nearly $9 trillion, larger than the GDP of every country on earth except the U.S. and China. This tenfold expansion happened with minimal public debate and no congressional vote.

The Fundamental Question

George Selgin of the Cato Institute argues that the Fed has not even accomplished its stated mission. The U.S. experienced severe deflation in the 1930s, runaway inflation in the 1970s, a housing bubble in the 2000s, and persistent inflation after the massive money creation of 2020-2021, all under the Fed's watch. The dollar has lost over 96% of its purchasing power since the Fed's creation. [4]

Defenders counter that the alternative (no lender of last resort) would mean a return to the recurring panics of the 19th century. The Fed, they argue, has stabilized the financial system and provided the monetary flexibility needed for a modern economy. This debate is legitimate and important. [6]

But regardless of where one falls on the merits of central banking, a basic principle remains: an institution with this much power over the economic lives of 330 million Americans should operate with transparency, face meaningful oversight, and be accountable to the democratic process. Whether that means a full audit, structural reform, or something else entirely, the status quo (vast power with minimal accountability) is difficult to defend on democratic grounds.

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Sources & Bibliography

Primary Source

Federal Reserve Act of 1913, Pub. L. 63-43

Signed December 23, 1913

The statute that created the Federal Reserve System. Full text and legislative history available through FRASER.

Academic

A History of the Federal Reserve (3 volumes)

Allan H. Meltzer, University of Chicago Press, 2003-2009

The most comprehensive academic history of the Federal Reserve ever written. Draws on meeting minutes and internal correspondence.

Academic

America's Bank: The Epic Struggle to Create the Federal Reserve

Roger Lowenstein, Penguin Press, 2015

Narrative history covering the four central figures and the secret 1910 Jekyll Island meeting where the plan was hatched.

Academic

Money: Free and Unfree

George Selgin, Cato Institute, 2017

Argues U.S. financial disorders are traceable to misguided regulations, and that the Federal Reserve reinforced rather than solved the root causes of instability.

Government

Federal Reserve: Oversight and Disclosure Issues

Congressional Research Service, Report R42079

Examines the tension between Fed independence and congressional oversight, including the "Audit the Fed" debate.

Institutional

Federal Reserve Act Signed into Law

Federal Reserve History (federalreservehistory.org)

The Fed's own institutional history project on the Act's passage and the compromises between Wall Street and populist demands.