- [Narrator] At the top of any US dollar bill,
you'll see this.
That's because even though the bill
may have come from the Treasury,
the Federal reserve is who actually distributes it.
- They're the ones that's charged with managing the currency
in circulation in our economy.
- [Narrator] In other words, they can kind of print money.
- Money printer go brr, right?
That was a popular meme in 2020 when the Fed
was creating money outta thin air.
- [Narrator] The Federal reserve is in many ways
in charge of the US economy.
As a former chairman once said,
"They're the economy chaperone who has ordered
the punch bowl removed just when the party
was really warming up."
Which means they know their decisions,
like raising interest rates, aren't always popular.
- The Fed is just this poorly understood
and really important institution in our country.
It's important for people to know
what's going on in the economy.
They should understand why we have the Fed,
why it does what it does,
and what role it plays in the country.
- [Narrator] So let's explain.
How did the Fed get put in charge of the punch?
The Fed, as we know, it has evolved over time,
after responses to financial crises
gave it more and more responsibility.
So let's start with why the Fed was created
in the first place.
In the early 1900s, bank runs were pretty common.
If a bank, a private business went out of business,
that meant everyone lost their deposits.
Fearful, people would run to their healthy bank
to withdraw their money.
Only banks didn't keep that much cash handy,
so they'd fail, causing more people to fearfully run
to their bank.
And back then there was nowhere for these banks
to get more cash to stop these runs.
After a large run in 1907,
wealthy bankers like JP Morgan, put up their own money
to essentially bail them out.
- After that panic in 1907,
business and political leaders got together and said
maybe this isn't the best way to run a modern economy,
to rely on a few wealthy individuals doing the right thing
in a time of crisis.
And so discussions began about creating a central bank,
or what became the Federal Reserve System.
- [Narrator] In 1913, the Federal reserve was created to be
the United States Central Banking System.
Basically a bank for banks.
It's 12 separate Federal reserve banks set up
all across the country.
- You had a lot of distrust still in the country
over having one bank.
The idea was that it might be too powerful.
So, you could go to different parts of the country
and say, well, the power won't be in New York.
It won't be in Washington, it'll be here.
There'll be a bank in Atlanta.
There'll be a bank in Kansas City.
There'll be a bank in San Francisco and Minneapolis.
- [Narrator] And two in Missouri.
- There was a senator from Missouri who was instrumental
in creating the Federal Reserve System.
And lo and behold, there's a Fed Bank
in St. Louis and in Kansas City.
- [Narrator] The idea was they would each represent
different regions of the country,
and would independently set their own policies
and interest rates on the money banks would keep with them.
There was also a president put in charge of each bank.
Then, the Great Depression hit.
It's widely agreed by historians
that the Federal Reserve Banks in action
and them keeping the circulation of money
and lending too tight, made the Depression worse.
And by widely agreed, nearly a century later,
a Fed governor said, "We did it."
- There were concerns even before the Great Depression
that the political compromise that had been necessary
to create this thing
had created too much decentralized power.
Nobody really was in charge.
- [Narrator] So in 1935, Congress put the
Washington based Board of Governors in charge.
It would be a group of seven people
from different parts of the country, including a chairman,
each nominated by the President and confirmed by the Senate,
just like a Supreme Court Justice.
They oversee the Federal Reserve System, these banks.
They also serve on the Federal Open Market Committee,
the FOMC, which also includes five bank presidents,
one from New York and four that rotate.
This is the group of people who get together
and decide things like interest rates.
- When you talk about a Fed meeting,
you're talking about a meeting of the FOMC.
The terms become interchangeable,
because there are certain things that the FOMC does.
There are certain things that the Fed Board does,
and they all kind of blend together.
- [Narrator] So that's how we got to
the basic foundation of the Fed.
But the Fed as we know it today,
with its many responsibilities,
was built from responses to even more financial crises.
Let's start with inflation in the 70s,
and in 1978, when Congress gave the Fed,
or really the FOMC, two main priorities.
- The Fed was given a dual mandate to focus on stable prices
and maximum employment.
Now sometimes those goals conflict with each other.
When you're trying to crush inflation,
sometimes you're gonna do things that cause unemployment
to go up, but the mandate really said
the Fed should take both of these objectives into account
when they set policy.
- [Narrator] This was because in the 70s,
inflation was really high.
Called the Great Inflation now, a mix of bad luck
and bad policies saw inflation reach nearly 15 percent.
- There were concerns that the Fed succumbed
to political pressure in the early 1970s
because the Fed chair at the time, Arthur Burns,
was friendly with the president and Nixon did not want him
to raise interest rates before his reelection in 1972.
So the whole experience of the Great Inflation
reinforced this idea that we should have
politically independent central banking
that generally, when you kept politics out
of the FOMC boardroom, you had better economic outcomes.
- [Narrator] In 1979, President Jimmy Carter
put Paul Volcker in charge of the Fed,
and he raised interest rates, a lot, to nearly 20 percent.
Unemployment skyrocketed and rose above 10 percent,
and people blamed the Fed.
- Home builders would mail two by fours
to the Fed and say, "Stop these oppressive interest rates."
They would mail keys for cars and houses to the Fed saying,
"These are homes and cars that aren't being sold."
There were were tractors that protested,
driving around at the Fed's headquarters.
History has vindicated the moves of the Volcker Fed.
He's lionized today as this figure who did something
that was really hard and really unpopular.
But if you look at the US economy
over the 30 years that followed,
the US economy performed better
than most other advanced economies.
- [Narrator] The Fed gained credibility
because it was politically independent,
since politics don't always make great economic policies.
And when the 2008 financial crisis arrived,
the Fed Chairman, Ben Bernanke,
learned from lessons of the past.
- The bold measures the Fed took in response
to the recent financial crisis, reflected in part
its determination to avoid repeating
the same sorts of mistakes it made before and during
the Great Depression of the 1930s.
- [Narrator] Those bold measures included things
the Fed had never done before, like dropping interest rates
to near zero for the first time.
In addition to managing the currency
and circulation and the occasional treasury security,
it started loaning money, a lot of money to non-banks.
It also got into new markets,
buying things like mortgage securities,
all this to pump money into the economy.
This got the Fed even more involved in parts
of the financial system,
beyond just currency and interest rates.
- One of the things Bernanke was well regarded for
was that he just threw everything against the wall
to see what would stick.
He made sure that it didn't get worse.
We call it the Great Recession
and not the second Great Depression.
- [Narrator] And Congress also gave it more authority
of oversight and regulation of the banking system
through Dodd-Frank, and just kind of by default of inaction.
- Government spending retreated after the stimulus in 2009.
And so there was this saying that the Fed had become
the only game in town.
If you needed to stimulate your economy,
you weren't gonna be able to cut taxes or spend more money
because Congress didn't wanna do that.
What ended up happening was that financial markets,
to a greater and greater degree, began to hang on every word
and every utterance of the Fed chair,
because now monetary policy was just so important
to the markets,
and also to the economic outlook for the country.
- [Narrator] Then came COVID.
The Fed took from the Great Recession Playbook.
It bought those same assets.
It began loaning more money to even more non-banks,
and it raised the amount of money in circulation, brr.
- What you see is a central bank that during periods
of severe stress, really, you know, national emergency,
is willing to do quite a lot to make sure
that the economy and the financial system holds together.
- [Narrator] Including when inflation rises.
- Today, in support of these goals,
the FOMC raised its policy interest rate
by one quarter percentage point.
- [Narrator] The Federal reserve began as a response
to a financial crisis, and has only grown
with each one since.
Although, not always without criticism.
- The time has come, let's end the Fed.
- [Narrator] The Fed is primarily still a bank for banks,
but it has also become the stop gap
for most other parts of the financial system.
They can make decisions quickly
and without political fallout.
- To the extent you have a handful of unelected people
making huge decisions about the economy.
It's something that Congress and the White House,
our elected leaders, have really decided over many decades
to really outsource this to the Fed.
- [Narrator] Basically, it's easier for the parents
to rely on the chaperone.
(gentle music)