Federal Reserve

The financial system consists of five parts, each of which plays a fundamental role in our economy. These parts are comprised of money, financial instruments, financial markets, financial institutions, and central banks. Money is used to pay for our purchases and to store our wealth. Financial instruments transfer resources from savers to investors and to transfer risk to those who are best equipped to bear it. Stocks, mortgages, and insurance policies are great examples of financial instruments. A financial market allows us to buy and sell financial instruments quickly and cheaply. Financial institutions provide numerous services, including access to the financial markets and collection of information about prospective borrowers to ensure they are creditworthy. Banks, securities firms, and insurance companies are a few examples of financial institutions. Finally, central banks monitor and stabilize the economy. (Cecchetti 2) The Federal Reserve System is the central bank of the United States and the European Central Bank is the central bank for Europe. They are identical in many ways but they also have their differences.

The Federal Reserve System is often referred to as the Federal Reserve or simply “the Fed.” It was created by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role has evolved and expanded. The Federal Reserve was created on December 23, 1913, with the signing of the Federal Reserve Act by President Woodrow Wilson. The Federal Reserve System has a structure designed by Congress to give it a broad perspective on the economy and on economic activity in all parts of the nation. It is a federal system, composed basically of a central, governmental agency, the Board of Governors, in Washington, D.C., and twelve regional Federal Reserve Banks, located in major cities throughout the nation. These components share responsibility for supervising and...