If you’re getting ready to move your savings from one bank to another, you might want to learn more about the Banking Act of 1935 and how it affects the way banks operate. The Act of 1935 gave the Board of Governors control over other tools of monetary policy.
Why is the Banking Act of 1935 Important?
For much of America’s history, banks have been one of its most important economic institutions. It was natural, then, that when it came time to write laws regarding banking during The Great Depression, Congress focused on them. America’s bank regulations come from five distinct pieces of legislation enacted between 1933 and 1935 including The Banking Act of 1935. This particular act made some pretty big changes to how banking is regulated in America.
The act increased Federal Reserve control over open market operations, which are transactions between a Federal Reserve Bank and a dealer in government securities. Previously, open market operations were primarily used to stabilize Banking Meme commercial banks by providing them with additional cash reserves when they experienced withdrawals by depositors or made loans that weren’t repaid. While deposits and loan repayments remained primary factors influencing open market activity in 1935, their role was supplemented by reserve requirements on member banks. The Banking Act of 1935 gave supervisory authority over U.S. monetary policy to a body called the Board of Governors.
The Banking Act of 1935 and monetary policy
While both require Federal Reserve approval, deposit rates are designed to be flexible to encourage economic growth, while reserve requirements are adjusted more frequently and often used as a method of macroeconomic stabilization by helping control inflationary pressure. Changes to either rate have an effect on money supply within an economy as well as consumer demand, which has knock-on effects across domestic markets.
The Banking Act of 1935 gave control over reserve requirements to Federal Reserve, which can adjust them whenever it is necessary. The idea behind setting such requirements is that in times when money becomes scarce or in other words when it is not easily available people would be more likely to save it instead of spending it. Due to lack of money people would have to reduce their consumption, which could help boost economic growth if all else remains equal (which rarely happens. However, given that changing interest rates is one of the methods used by governments or central banks for the fiscal and monetary policy there are situations when raising interest rates may be done for different reasons.
The Banking Act of 1935 was a major overhaul of the Federal Reserve System. It created the Federal Open Market Committee, which determines U.S. monetary policy by voting on changes to reserve requirements and interest rates for member banks. Although it’s commonly known as an act of Congress, officially it’s an act of Congress and President Franklin D. Roosevelt that changed other acts of Congress: The Federal Reserve Act and Emergency Banking Act of 1933.
The most important part of The Banking Act of 1935 is Section 16, which grants Federal Reserve Banks more control over their reserves. Before 1935, private banks could store Federal Reserve Notes at a reserve bank and earn interest on them. The banking act reduced reserve requirements for member banks, which is how much cash they have to keep on hand versus how much they loan out. Lowering reserve requirements encouraged member banks to make loans, creating money in circulation. It also increased interest rates on deposits so people wouldn’t hoard excess cash under their mattresses. The act also created what’s now known as reverse repurchase agreements reverse, which is used today as monetary policy tools by central banks around the world.