Federal Reserve Act

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Term Paper Title	Federal Reserve Act
# of Words	1931
# of Pages (250 words per page double spaced)	7.72

Federal Reserve Act

The Federal Reserve: A Knight in Shining Armor

"To suffer either the solicitation of merchants or the wishes
of government, to determine the measure of the bank issues,
is unquestionably to adopt a  very false principle of conduct."
                    -Henry Thornton, 1802

     The banker was frantic.  A large mob was gathering outside his bank and the people were clamoring for their money. The banker called the Federal Reserve Bank in Minneapolis and warned that unless this "mad run" were stopped, he would soon be out of currency.  With the bank nearly two-hundred miles from Minneapolis, a small plane carrying two Federal Reserve Bank officials and a half-million dollars in cash were quickly flown into town.   Upon approaching the town the pilot guided the plane low over the main street in a sensational arrival and then landed. From there, the money was carried ceremoniously into town and stacked along the bank's teller windows. The sight of the money calmed the customers fears and saved the bank from failing.
     Stories of bank runs- tales of people running to withdraw all their cash from their accounts- may seem dramatic, almost theatrical to people today. But to people living in an economically unstable society, like the early twentieth century, they were an expected occurrence.  The banks were independent rivals, the amount of currency in circulation was fixed, and there was no element of trust between the depositor and the bank.  Abram P. Andrews, secretary of the National Monetary Commission in 1908 provided a vivid description of the banks' quandary at the time:
         "[The banks] were so singularly unrelated and independent of each other that the majority of them had simultaneously engaged in a life and death contest with each other, forgetting for the time being the solidarity of their mutual interest and their common responsibility to the community at large. Two-thirds of the banks of the country entered upon an internecine struggle to obtain cash, had ceased to extend credit to their customers, had suspended cash payments and were hoarding such money as they had." (Born...,12).

     The banks, in an attempt to avoid bank runs, were hoarding their money. However in order to hoard the money, they did not lend any out, bringing the economy to a standstill. The credit system of the country had ceased to operate, and thousands of firms went into bankruptcy (Born...,.12). Something had to be done that would provide for a flexible amount...

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