When Did the Federal Reserve Become Independent?

The Congress clearly told us during 1935 and 1951 that Federal Reserve independence would not be subject to the President’s power.

But it all began in lower Manhattan during October 1907.

A Bank Run

Anxious depositors could be seen camping overnight as they waited for the banks to open. Stuck for hours, they got food from friends and numbers from the police to establish their place in line. Meanwhile bank tellers were told to count out the money very, very slowly.

A failed attempt to corner the shares of United Copper had started the problems. When the news spread, depositors rushed to withdraw their money from the Knickerbocker Trust. Knowing that the Knickerbocker Bank had funded the disastrous maneuver, depositors feared its demise. However, they then hastened it by trying to withdraw more than the bank could give them. Soon, the fear moved beyond Knickerbocker to more banks and to less industrial production.

A good solution did not exist. At that time, the Knickerbocker and other ailing financial institutions had no way to get a cash infusion. With no central banking authority to connect them, healthy banks could not send cash to the sick ones. There was only J.P. Morgan. As a banking superpower, he gathered the resources that ended the panic.

The next part of our story takes place three years later.

Creating the Federal Reserve

At an elite and inaccessible club in Georgia, six leading financiers and bankers secretly met during November 1910. They were even told to board a private train in New Jersey separately for the ride to Georgia.

The club where they met:

Knowing financial panics could be controlled by a nationwide banking system, the Jekyll Island group sought to create one. Because a central monetary authority could respond to financial crises, they needed national control of the supply of money and credit. The answer was the Federal Reserve System.

Created in 1913 as an independent agency, the Federal Reserve was increasingly protected from presidential influence in 1935 and then 1951.

Our Bottom Line: Federal Reserve Independence

The Banking Act of 1935

Fully recognizing that the original Federal Reserve Act needed strengthening, the Congress revisited the issues during 1935. After reviewing a House version that supported presidential power over the Federal Reserve, the Senate disagreed. As they explained, only by avoiding political influence over monetary policy could they avoid inflation and preserve sound policy. After considerable debate, the House and Senate agreed that the president’s hands should remain far from the levers of monetary policy.

The 1951 Accord

The battle over Fed independence came to a head in early 1951 in a meeting between the Federal Open Market Committee and President Truman and his staff. When the President tried to dictate Fed policy, Chair McCabe indicated his responsibility was economic stability. Making a very long story much shorter, we leap to the end with a 1951 accord that established the independence of the Fed.

The Fed’s Independence

Presidents rarely like elevated interest rates. As a result, political practicalities rather than economic logic could dictate their monetary policy. It would prevent the Fed from achieving their dual mandate of high employment and stable prices.

As a result, 1935, 1951 and 2025 could provide the three steps to Federal Reserve independence.

My sources and more: For the story of the Fed’s origins, I’ve quoted and edited my own Econ 101 1/2. Then, the relevance of these two articles, here and here, was ideal for all that unfolds today on Federal Reserve independence. And finally, the 1935 Humphrey’s executor decision could remain relevant as a well as the Fed website for the whole 1951 story,.