Federal Reserve Bank's Role in Thesis

  • Length: 8 pages
  • Sources: 2
  • Subject: Economics
  • Type: Thesis
  • Paper: #57894666

Excerpt from Thesis :

The new government banks put heavy taxes on state banks, and they were forced to go under. After this, the government had a monopoly on banking and money again, and they used it to the fullest extent possible. One of the main problems with the banking system, though, was that there were still a lot of cash flow problems and other weaknesses that led to panics for individuals who were holding onto bank notes (Wells, 1987). There were many restrictions placed on new banks, and they could do virtually nothing. This was very frustrating for them, and they were not able to do anything that actually worked to help the economy in any way. Part of this came from a lack of branching out, but most was related to the strict control that was held over them.

Allowing the branching out of banks would have made things run more smoothly, as branching out did not require a new charter in the way that opening an entirely new bank would have. There would not be any need for all the red tape, a naming of officers, and everything else that would come along with the opening of a new bank. Branching made things a lot simpler for everyone involved, and it also allowed money to be distributed and collected more easily than separate banks would have allowed for (Dunbar, 1917). By branching out and restructuring themselves carefully, the banks could take advantage of different legal statuses and get tax breaks and other things that they otherwise would have missed, but they would need to turn themselves into bank holding companies, which would then acquire various banks as part of their business model. These banks would be managed by a company, which is different from the way that a normal bank is usually managed.

Another problem that the banks were facing was that they were required to hold a certain amount of money which could be used to secure the banknotes that they had issued. Being required to keep a lot of money on hand made things difficult for them, as they were quickly limited as to how many banknotes they could issue. If they had been allowed to keep a lower ratio of money to banknotes, they would have been in a much better position with both the government and those who held the banknotes.

Clearinghouses were becoming more popular as more banks struggled to keep a proper balance between the collateral they had to hold and the banknotes they wanted to loan. These clearinghouses worked by allowing banks to use a loan certificate to pay their debts instead of using their actual currency. These banks had to have a lot of collateral that they could use to pledge to get the certificates, but this was generally not seen as a problem. This helped to stretch the amount of currency that was available, and banks that had plenty would take the certificates because they could earn an interest rate of six percent on them (Timberlake, 1984).

In the present day, the banking system is made up of twelve member banks that belong to a more centralized system. In 1951, the Federal Reserve was officially established as a separate entity, apart from any other type of governing body. It has gone from taking a role in things that was very passive to being highly active within the monetary system of the United States. Even the past Federal Reserve Chairman Alan Greenspan has admitted that the Reserve had learned a lot in the eighty-three years that it had been in existence, but there was still more to learn, and there was always the chance of making mistakes, even after learning all that one can learn from the past and those experiences (Crutsinger, 2002).

Even though the people who make up the policies for the current banking system in the United States know a great deal, no one can know everything about banking. There are times when policy-makers have chosen the wrong path simply because they did not have all the knowledge that they really needed to make the proper decision. Much of what has been learned throughout history will work to help the decision makers today choose the right path for the banking system, and history will hopefully avoid repeating itself with the panic that was seen in the early 1900s.

Over the course of U.S. history, the Federal Reserve has become more knowledgeable about how true economic policy actually comes about, and this has also made it much better not only at forecasting what will happen, but at working to minimize the damage if it appears as though problems are starting to develop. This is largely why serious and significant issues like the terrorist attacks in 2001 did not cause an extreme stock market crash and depression like the one that took place in 1929.

The Federal Reserve is much more aware of and in control of economic issues now, and since they control the money differently than the original government banks did, there are not constant problems where there is a lack of currency and notes that have to be bought at cheaper rates because they came from a certain state or a different part of the country. However, the economic crisis that the U.S. And other countries seem to be dealing with at the moment is upsetting, and it is a serious concern for the Federal Reserve Bank and many smaller banks, as well. Bank holding companies are doing better than standard banks because they have legal protections and options as a company that they would not have if they were only operating as a bank. The Federal Reserve Bank does not have as much ability to enforce rules over them or regulate what they do.


Banks today operate much more smoothly than they did in the days before the Federal Reserve. Having a centralized idea for banking makes a lot more sense. However, the role that the Federal Reserve Bank plays is a little bit different when it comes to bank holding companies. The Reserve regulates the banks that the company holds, but it does not regulate the company itself. These holding companies often have other businesses as well, in addition to the banks, and that can make a difference in how they are viewed and how they are treated. Because their legal status is different they do not interact with the Federal Reserve Bank that much. Mostly, the banks that they hold have that interaction and the holding company focuses more on profit and loss, day-to-day operations of the banks and other businesses that it holds, and a growth rate for shareholders and others who are looking for a profitable company.


Bankers Online. (2003). Regulation Z. Retrieved at http://www.bankersonline.com/regs/226/i226.html

Crutsinger, M. (2002). Greenspan says economic policy-makers will never be able to avoid all mistakes. AP Worldstream.

Dunbar, C.F. (1917). The Theory and History of Banking. 3rd Ed. New York: Knickerbocker Press.

FDIC. (1953). U.S. Federal Deposit Insurance Corporation. Annual Report. U.S. Department of the Treasury. Office of the Comptroller of the Currency Annual Reports, 1908, 1914, 1915.

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Rolnick, a.J. And Weber, W.E. (1982). Free Banking, Wildcat Banking and Shinplasters. Quarterly Review, Federal Reserve Bank of Minneapolis, 6, 10-19.

Timberlake, R.H. Jr. (1984). The Central Banking Role of Clearinghouse Associations. Journal of Money, Credit and Banking, 16, 1-15.

Wells, D.R. (1987).…

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