The Federal Reserve System

The Federal Reserve System

Here in the United States we have a complex financial system. The backbone of the financial system is our nation’s banks. Today they work together and rather efficiently to handle the transactions of liquid assets that take place constantly. And in order to do so there must be some rules of the road in which these banks must follow to keep the machine, which is the U.S. economy, well-oiled. Therefore it was decided upon in 1913 to establish a central bank that would have the responsibility of managing our economy. The Federal Reserve Act of 1913 gave enormous power to the private banking institution, the Federal Reserve (the Fed), to protect our dollar and manage our economy in a way that would provide efficiency along with security to the markets.

The Fed consists of five components: Member Banks, Federal Reserve District Banks, a Board of Governors (BOG), a Federal Open Market Committee (FOMC), and advisory committees. Each component acts to micro-manage the market place. Member Banks are those local branches that adhere to the Fed’s policies and they make up about one-third of the nation’s commercial banks. The District Banks hold reserve balances for depository institutions and lend to them at the prevailing discount rate, as well as issue new currency and withdraw damaged currency from circulation. And one of their biggest responsibilities is to handle U.S. government debt and cash balances. There are 12 district banks in all. The BOG sets reserve requirements and approves discount rates as part of monetary policy along with establishing and administering regulations on consumer finance. The FOMC is made up of the BOG and five Reserve Bank presidents. They are responsible for directing open market operations, which are the primary instruments of monetary policy.

The reserve requirement is a bank regulation that sets the minimum reserves each bank must hold relative to customer deposits and notes. If someone...