Zaid

We got a great one for you today.

Let's dive in.

To understand why the Federal Reserve is so important, you have to first look at how things were like before they existed.

The American banking system before the Fed was a total mess.

See, throughout the 1800s, a financial crisis was like a seasonal event.

years, people would lose confidence in their banks.

Then everyone would rush to the bank to withdraw their money at the same time.

The bank would then collapse because remember, banks don't keep all their deposits in cash in the vaults.

So these bank runs would destroy livelihoods and take down the economy.

And this was happening regionally every few years.

The breaking point was the Panic of 1907.

This bank run was so bad that multiple banks in New York collapsed and the stock market fell 50% in three weeks.

I mean, imagine that happening today.

Like we freak out when the markets drop 5% in three weeks, imagine 50%.

So things got so bad in 1907 that JP Morgan, yes, the actual guy who made the bank had to step in himself.

He gathered the city's top bankers into his private library.

He locked the doors and he refused to let them leave until they agreed to pool their money together and bail out the banking system.

After that, Congress finally stepped in.

I think they realized that maybe it wasn't a great idea to rely on a handful of rich bankers to bail out the economy every time things went south.

So in 1913, Congress passed the Federal Reserve Act, which created the Federal Reserve.