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The Purpose Of The Federal Reserve System

2692 words - 11 pages

Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such a control over our Economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds.

The Federal Reserve System is the central banking authority of the United States. It acts as a fiscal agent for the United States government and is custodian of the reserve accounts of commercial banks, makes loans to commercial banks, and is authorized to issue Federal Reserve notes that constitute the entire supply of paper currency of the country. Created by the Federal Reserve Act of 1913, it is comprised of 12 Federal Reserve banks, the Federal Open Market Committee, and the Federal Advisory Council, and since 1976, a Consumer Advisory Council which includes several thousand member banks. The board of Governors of the Federal Reserve System determines the reserve requirements of the member banks within statutory limits, reviews and determines the discount rates established pursuant to the Federal Reserve Act to serve the public interest; it is governed by a board of nine directors, six of whom are elected by the member banks and three of whom are appointed by the Board of Governors of the Federal Reserve System. The Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago, San Francisco, Cleveland, Richmond, Atlanta, Saint Louis, Minneapolis, Kansas City and Dallas.
The Federal Open Market Committee, consisting of the seven members of the Board of Governors and five members elected by the Federal Reserve banks, is responsible for the determination of Federal Reserve Bank policy in the purchase and sale of securities on the open market. The Federal Advisory Council, whose role is purely advisory, consists of 12 members if they meet membership qualifications.
The Federal Reserve System exercises its regulatory powers in several ways, the most important of which may be classified as instruments of direct or indirect control. One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of...

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