On August 23,1935, Congress approved legislation that had a major impact on the Federal Reserve Banks, the Banking Act of 1935. This Act structurally altered forever the entire concept behind the Federal Reserve whereas its purpose originally was to provide stability with respect to internal capital flows in addition to a regulatory clearing house for the banks. Each branch maintained its separate interest rate to attract capital to a region or to deflect it to prevent another Panic of 1907 when cash flowed from the East to the West because of the San Francisco Earthquake of 1906.
Consequently, the Banking Act of 1935 drastically altered the Fed with also changing things such as:
- -Renamed the chief executive officers of Reserve Banks as President and First Vice President; provided for their appointment to five-year terms by respective Boards of Directors, the appointments subject to approval by the Board of Governors.
- -Required that Reserve Banks establish discount rates at least every fourteen days.
- -Created a Federal Open Market Committee to consist of the Board of Governors plus five representatives of the Reserve Banks. Its decisions on the conduct of open-market operations were to be binding on the Banks.
The Banking Act of 1935 established a new relationship between the Board of Governors and the twelve Federal Reserve Banks. As the Board of Governors viewed the Act, “It preserves the autonomy of the regional Banks in matters of local concern, but places responsibility for national monetary and credit policies on the Board of Governors and the Federal Open Market Committee. “
With passage of the Banking Act of 1935 and pursuant regulations of the Board of Governors, Reserve Banks maintained only a meaningless regional bank pretense. No longer would there be different interest rates within the nation for regional capital flows, now the Fed was usurped and the sphere of national monetary policy was now centered in Washington DC.