Good afternoon, ladies and gentlemen.

My name is Thành and our name group is

Captain American. Today, I represent my group to bring an owerview of the history
of central banking and the evolution of the Federal Reserve System in the US. Our
presentation want to focus on two main point: first, The history of central banking
and second, the evolution of the Federal Reserve System in the US. Before starting
our presentation, let's understand the definition of a central bank. A central bank is
the term used to describe the authority responsible for policies that affect a
country’s supply of money and credit. More specifically, a central bank uses its
tools of monetary policy—open market operations, discount window lending,
changes in reserve requirements—to affect short-term interest rates and the
monetary base (currency held by the public plus bank reserves) and to achieve
important policy goals. There are three key goals of modern monetary policy. The
first and most important is price stability or stability in the value of money. Today
this means maintaining a sustained low rate of inflation. The second goal is a stable
real economy, often interpreted as high employment and high and sustainable
economic growth. Another way to put it is to say that monetary policy is expected
to smooth the business cycle and offset shocks to the economy. The third goal is
financial stability. This encompasses an efficient and smoothly running payments
system and the prevention of financial crises.
Now, let’s turn on the history of central banking. The first prototypes for modern
central banks were the Bank of England and the Swedish Riksbank, which date
back to the 17th century. The Bank of England was the first to acknowledge the role
of lender of last resort. Other early central banks, notably Napoleon’s Bank of
France and Germany's Reichsbank, were established to finance expensive
government military operations. It was principally because European central banks
made it easier for federal governments to grow, wage war, and enrich special
interests that many of United States' founding fathers—most passionately Thomas
Jefferson—opposed establishing such an entity in their new country. Despite these
objections, the young country did have both official national banks and
numerous state-chartered banks for the first decades of its existence, until a “free-
banking period” was established between 1837 and 1863.
The National Banking Act of 1863 created a network of national banks and a single
U.S. currency, with New York as the central reserve city. The United States
subsequently experienced a series of bank panics in 1873, 1884, 1893, and 1907. In
response, in 1913 the U.S. Congress established the Federal Reserve System and
12 regional Federal Reserve Banks throughout the country to stabilize financial
activity and banking operations. The new Fed helped finance World War I and
World War II by issuing Treasury bonds.
Between 1870 and 1914, when world currencies were pegged to the gold standard,
maintaining price stability was a lot easier because the amount of gold available
was limited. Consequently, monetary expansion could not occur simply from a
political decision to print more money, so inflation was easier to control. The
central bank at that time was primarily responsible for maintaining the
convertibility of gold into currency; it issued notes based on a country's reserves of
gold. At the outbreak of World War I, the gold standard was abandoned, and it
became apparent that, in times of crisis, governments facing budget
deficits (because it costs money to wage war) and needing greater resources would
order the printing of more money. As governments did so, they encountered
inflation. After the war, many governments opted to go back to the gold standard to
try to stabilize their economies. With this rose the awareness of the importance of
the central bank's independence from any political party or administration. During
the unsettling times of the Great Depression in the 1930s and the aftermath of
World War II, world governments predominantly favored a return to a central bank
dependent on the political decision-making process. This view emerged mostly
from the need to establish control over war-shattered economies; furthermore,
newly independent nations opted to keep control over all aspects of their countries
—a backlash against colonialism. The rise of managed economies in the Eastern
Bloc was also responsible for increased government interference in the macro-
economy. Eventually, however, the independence of the central bank from the
government came back into fashion in Western economies and has prevailed as the
optimal way to achieve a liberal and stable economic regime.
Ok, let’s move on to the evaluation of the Federal Reserve System in the US. First
of all, we come to Money and Banking before the Federal Reserve. Before the
Civil War, the monetary system the United States used was the metal standard, in
which the dollar was backed by gold or silver.
- The Civil War led to two significant changes:
+ The Union government issued unbacked paper currency, called greenbacks.
+ A system of nationally chartered banks was established.
Some of the most contentious political debates of the postbellum era concerned
money and banking, with Republicans favoring a return to the gold standard and
Democrats often advocating for expanding the currency. The Gilded Age was
characterized by frequent banking panics. The 1907 panic led to the creation of the
National Monetary Commission to study banking reforms. Second, The Federal
Reserve as a Lender of Last Resort. Inspired by the monetary and banking systems
of European countries, Republican senator Nelson Aldrich proposed a privately
owned, highly centralized “National Reserve Association of the United States” to
serve as a central bank and lender of last resort. The Federal Reserve Act of 1913
was a result of compromise between those who favored a centralized bank and
those who were more skeptical of concentrated financial power. The act established
the Fed, consisting of a board of governors in Washington, DC, and 12 regional
banks, each in charge of a geographic district. All nationally chartered banks were
required to join the Fed, hold stock, and be subject to Fed regulation. The Fed’s
primary role was to serve as a lender of last resort to member banks. During this
period, the US was on the gold standard, so the Fed’s focus was on managing the
money supply to maintain the convertibility of the dollar to gold.
Thirdly, The Federal Reserve in Wartime. During World War I, the Federal Reserve
was still a new institution, having been established in 1913. Supporting War
Financing: As the U.S. entered the war in 1917, the Fed played a critical role in
supporting the U.S. Treasury’s efforts to finance military expenditures. One of the
key ways the Fed did this was by helping to market Liberty Bonds, which were
government-issued bonds sold to the public to raise funds for the war. These bonds
became a major tool for war financing, encouraging patriotic citizens to lend
money to the government. Involvement with Commercial Banks: The Fed also
worked with commercial banks to purchase Treasury bonds directly. By
encouraging banks to buy government bonds, the Fed helped ensure that there was
adequate financing for the war effort. Development of Monetary Tools: One of the
most important lessons the Fed learned during and after World War I was how to
use open market operations to influence economic conditions. These operations
allowed the Fed to better control inflation and economic growth, a way to stabilize
prices and moderate the business cycle. Creation of the Federal Open Market
Committee (FOMC): The FOMC was created to formalize the role of open market
operations as the primary tool for influencing the money supply and interest rates,
allowing the Fed to have a more direct and systematic influence over economic
conditions. The Fed’s ability to control monetary policy was limited by the gold
standard until 1933, when President Franklin D. Roosevelt ended it to fight the
Great Depression. During World War II, the Fed helped the Treasury by keeping
interest rates low, and price controls were used to manage inflation. After the war,
the dollar was linked to gold again under the Bretton Woods agreement. In the
Korean War, the Fed was pressured to keep interest rates low, but this led to rising
inflation. In 1951, the Treasury-Fed Accord was reached, giving the Fed more
independence to control inflation.
Fourthly, The Great Inflation and the Dual Mandate. In the 1960s and 70s,
policymakers mistakenly thought they could lower unemployment by allowing
higher inflation, leading to overly loose monetary policy. As inflation rose, the U.S.
couldn’t keep enough gold to back the dollar, so President Nixon ended the gold
standard. Energy crises made inflation and unemployment worse. In 1978,
Congress gave the Fed a "dual mandate" to focus on both full employment and
stable prices. So, What’s the “Dual Mandate”? -> Two goals of price stability and
maximum sustainable employment are known collectively as the "dual
mandate." The Federal Reserve's Federal Open Market Committee, which sets U.S.
monetary policy, has translated these broad concepts into specific longer-run goals
and strategies.
 Price Stability:
The Fed aims for 2% inflation, measured by the Price Index for Personal
Consumption Expenditures (PCE), as the best rate to meet its goals. The Fed
considers this target flexible and is concerned if inflation stays too high or
too low.
 Maximum Employment:
The Fed doesn't set a specific employment goal because many factors
influence the job market and can change over time. Instead, the Fed uses
various labor market data to guide decisions. The median estimate for the
normal unemployment rate is around 4.1%.
This put the Fed in a tough position—tighter monetary policy would raise the
already high unemployment rate, but looser policy would increase inflation. Fed
Chair Paul Volcker decided to prioritize fighting inflation, even if it meant a
temporary recession. Volcker's Fed succeeded in reducing inflation, showing the
power of monetary policy and the importance of having a central bank firmly
committed to fighting inflation. Since then, the Fed has managed its dual mandate
through interest rate changes announced by the FOMC, which adjusts rates to
control inflation or boost employment. During the Great Recession and COVID-19
crisis, the Fed expanded emergency lending. In 2012, it set a 2% inflation target,
later modified to an "average" target. After the COVID-19 recession, the Fed let
inflation rise while prioritizing employment. Now, it’s raising interest rates to
control inflation, hoping to avoid a major recession. This is the end of our
presentation. Thank you for your attention.