The Federal Reserve System

Federal Reserve System of the United States, established in 1913, is an independent agency that regulates and oversees the nation's banking system. The Federal Reserve System is known as the central bank of the United States. Its most important job is to assist the U.S. government in managing the economy by encouraging economic growth and controlling inflation. It pursues these goals by influencing interest rates and, the availability of money and loans. The program the Fed follows in influencing interest rates is called its monetary policy. The Fed also performs many financial services for the federal government and provides numerous services to commercial banks. The Fed was established to provide a way to strengthen the supervision of the American banking system, and also to provide a flexible currency. After the Franklin Roosevelt administration and the programs designed to improve fiscal policy after the depression, Congress gave the Federal Reserve authority to set reserve and margin requirements. Many see the position of Chairman of the Federal Reserve as being one of the most powerful economic positions in the nation -- one that is not at the whim of different presidential administrations.

Prior to the establishment of the Federal Reserve, individual states and companies could print their own currency, there was no insurance for deposits, and if an organization ran out of funds, they simply closed. This caused most Americans to lose confidence in the system and made it very difficult for the U.S. Government to manage long-term currency issues. The modern role of the Federal Reserve is quite simply to develop and maintain sound monetary policy that will reduce the likelihood of either recession (too little goods being sold and not enough wealth circulation) or inflation (higher prices as too much money circulates). Neither are optimum for the balanced circulation of money in the market. In fact, it is for this very reason that there are times when it is in the country's best interest to decrease the money supply, and therefore reduce the impending imbalance in the market, spurring inflation.

The 12 Federal Reserve Banks are the private sector check and balance to the Federal Reserve. They have three primary roles: 1) To Establish and implement sound monetary policy, 2) To provide a number of financial services to banks (hence the term, Banker's bank -- loans, clearing house, etc.), and 3) The supervision of banks or bank holding companies (companies who own several banks). This system keeps the nation's banks in check for following rules, not discriminating in lending practices, and having enough resources to service its depositors. The Open Market Committee is the Fed's actual arm of decision making -- recommending what to do with the supply of money, interest rates, and the manner in which it lends money to banks, which translates down to the interest banks charge the consumer.