What, Where, and Why is the Federal Reserve

The Federal Reserve is the central bank of the United States of America. It’s a tad ironic that we even had a central bank, since it’s been in our blood to resist institutions that are particularly centralized. However, you’d be surprised that the bank has actually helped the nation out of a near financial fallout. You’d also be surprised to hear that it also caused a great number of financial fallouts as well. Confused? Good, that’s what this essay is for.

Before the Federal Reserve, banking relied on the Civil War National Banking Act. In the system, money too often pooled into the hands of the rich and stayed there. There was no way to expand, and there was no way to increase the money in circulation. Around 1906, the system began to crumble and the president ordered two investigation teams to research what was wrong with the then system. By 1912, the investigators concluded that the system was indeed not working and it had to be replaced. Woodrow Wilson, as he became president in January of that year, began the drafting of The Federal Reserve Act. In late 1913, it was passed and implemented.

Congress stated that the purpose of the Fed was to “to provide for the establishment of the Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”

The system is standalone. It is a central bank independent that does not need the go from the President, or anyone in the executive branch for that matter, to carry out actions. However, it is subject to oversight by the U.S. Congress. It can’t just do whatever it wants.

The executive portion of the Federal Reserve consists of a Board of Governors and 12 regional Federal Reserve banks.

They share the responsibility for supervising the money within their districts. And supervising the lesser banks.

The districts are: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis,, Kansas City, Dallas, San Francisco.

There are also advisory committees that influence the decisions of the Fed. These include the Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council. The Federal Advisory Council meets, customarily, four times a year, as opposed to the other two who meet three times a year.

The Fed establishes its control over monetary policy through Federal Fund rates, or the rate that banks trade balances with the Fed.

It does so in several ways:
Open Market Operations - The purchase or sale of securities in the open market. 90% of the Fed’s revenues come from this
Reserve Requirements – depository institutions have a certain cash requirement that they must keep in the Reserve
Contractual Clearing Balances – additional money to the Reserve Requirements which the depository institution agrees to put in
and lending programs

The Federal Reserve swerves between buying and selling securities, because it typically does not want to permanently increase or decrease its reserves.

The Fed essentially hands I.O.U.’s to the banks.

Though the money is procured out of thin air, it is meant to encourage and stimulate a bustling economy. As seen by history, this hasn’t always been true as our economy is characterized by booms and busts.