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What´S The Federal Reserve System Essay

1891 words - 8 pages

What is the Federal Reserve System? The Federal Reserve was founded in 1913 in response to the 1907 as a result of a severe financial panic. Up until this point in U.S history the United States did not have a concrete currency like it does today, instead thousands banks had their own currency and depending on the stability of the bank, the money was worth more. After the 1907 crisis, several national known politicians gathered at Jekyll Island, and constructed the Aldrich Plan, which outlined the development of the Federal Reserve System. The Federal Reserve serves as the primary authority on monetary policies and issues. Also known as the Fed, the Federal Reserve is meant to serve as a ...view middle of the document...

The Federal Reserve banks are the lenders of last resort, if a banking crisis is on the horizon the Fed can step in and soften the impact and contain risk that may arise in financial markets. In addition to the Board of Governors, and the 12 Federal Reserve Banks, there is a committee known as the Federal Open Market Committee (FOMC) who are tasked with assisting the Board of Governors with conducting monetary policy. The FOMC is composed of 12 members: the president of the New York Federal Reserve Bank, four other Federal Reserve Bank presidents, and the seven members of the Board of Governors. The FOMC meets every few weeks to discuss and alter monetary policy more specifically being to adjust discount rates (interest rates for banks), reserve requirements, and Open market operations. Below the 12 Federal Reserve banks are commercial banks and thrifts which the monetary policy of the Fed is applied to. At the base of the Federal Reserve is the public households and business in which the Fed’s decisions ultimately affect. The general public is the foundation for which the banking system as a whole would not work without.
The functions of the Federal Reserve are classified into four categories: monetary policy, regulation, government services, and non-government services. Their role in monetary policy is partially to examine the market and report findings, participate in the FOMC, and adjust the interest rates for banks, in order to encourage or discourage lending. The Open Market Operations that the Fed oversees are used to control the amount of money available and its flow. The control of Open Market Operations is comparable to watering a plant. If there is too little water in the soil, the plant will die, the same result will occur is there is too much water in the soil. The same concept goes for the economy, if there is too much money available it leads to inflation of prices, and if there is too little money, demand for good falls. It is important to keep a tight balance between the two extremes. To change the amount of money is reserve the Federal Reserve will buy or sell securities. When the Fed buys securities, the selling bank’s reserves go up and more money is available to loan, increasing their flow or money. When the Fed sells securities, the buying bank has less reserves and less money to loan out, making them less willing to lend out loans, thus decreasing the flow of money. The Federal Reserve banks help regulate the banks by doing inspections. The office of the Comptroller of the Currency (OCC) under the U.S department of the treasury carries out many of these inspections. The OCC checks to see that Federal Branches and agencies of foreign banks in the U.S are operating in a safe, reasonable manner and that they are following the laws. Along with The Fed, and The OCC, the Federal deposit insurance corporation also supervises banking, mainly those whose deposits it insures (McConnell, Brue, & Flynn, 2012, pp. 290). The government...

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