The Federal Reserve System

What the world needs now is Money Sweet Money”; that is not the way the song goes however that is surely the way our world and economy does. Money and its importance relative to the US Government have always been difficult to figure out especially when it comes to interest rates. Due to our Federal Reserve System, its chairman Alan Greenspan, and his Board of Governors dedicated to seeing that our economy blossoms; those doubts have become a thing of the past, for now.

The Federal Reserve System is a central banking of the US Government, most commonly known as the Fed. A central bank serves as the banker to both the banking community and the government. It issues the national currency, conducts monetary policy, and plays a major role in the supervision and regulation of banks and bank holding companies. Congress created the Fed in 1913. It was designed to ensure political independence and sensitivity to the many different economic concerns. The chairman and the six other members of the Board of Governors who oversea the Fed are nominated by the President of the United States and confirmed by the Senate. There are twelve District Reserve Banks, subsequently located in Boston, New York, Philadelphia, in Richmond, VA. In Atlanta, GA., Cleveland, OH. St. Louis and Kansas City, MO., Chicago, Minneapolis MI., Dallas, TX. And San Francisco. Each bank is responsible to a 9 member Board of Directors, which is set in a three-class system. The three classes are defined as A, B, and member banks elect C. Class A and the Board of Governors appoints B Directors and Class C. The Board of Directors is responsible for the administration of its banks and the appointment of the banks president and vice-president. This process is set from the base of the Fed structure. Within the Fed system there are member commercial banks. All national banks must join this system. They must purchase capital stock in their District Reserve Bank, entitling them to a six percent stock dividend, thus issuing them the right to vote for six of the nine Directors of that District Bank. Within this structure there was the Monetary Control Act of 1980 which imposed a reserve requirement on all depository institutions, which allows them to borrow and receive other services from the Fed. This remains beneficial because by enabling banks to borrow reserves from the Reserve Banks the liquidity of the entire banking system is increased.

With that said the basic function of the FED relates primarily to the maintenance of monetary and credit conditions favorable to sound business activity in all fields; agricultural, industrial and commercial. Among this some duties include the following: lending to member banks, open market operations, establishing discount rates, fixing reserve requirements and issuing regulations concerning these and other functions. Each Federal Reserve Bank is best described as a Bankers Bank. In a nutshell, member banks use their reserve accounts with their reserve banks similar to the way we use our own checking account. They may deposit in the reserve accounts the checks on other banks and surplus currency received from their customers, and they may withdrawal on the reserve. Thus a bank with excess in the reserve requirements can enlarge its extension of credit (loans). However, let’s not forget that the Fed has the power to increase or decrease the supply of excess funds thus giving them major control over the amount of credit banks can extend.

With inflation/deflation being an issue, the Fed has always been best known to the public for the influence it has on the interest rates by changing the access of the money supply. This term means the amount of money available at any one time in the US financial system. The most frequently used instrument in controlling the money supply is the Feds open market operations. When the Federal Open Market Committee (FMOC) decides that the money supply is growing too slowly the Fed can purchase government securities thus injecting cash into