- [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)
