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The American Federal Reserve

The Federal research system started on December 23, 1913, after President Woodrow Wilson signed the Federal Reserve Act into law. It composed of a central, independent government agency who is the Board of Governors in Washington, D.C. The 12 regional Federal Reserve Banks were also located in the major cities all over the nation. In Today’s world, the Federal Reserve System sets the state monetary policy, it supervises and also it provides the financial services to various institutions that need money. It also provides the financial services to US government and foreign official institutions.

Before the foundation of Federal Reserve, the US nation was bankrupt. During this time, the bankruptcy led into several waves of panics, and this made most citizens to rush to their bank accounts so as to withdraw their deposits. A specific failure of a bank often had a negative impact towards others. The panics could make the customers to rush to withdraw money from their depository banks even if those banks had no sign of failing. Banks in the US needed a source of caution reserves to prevent any panics and the customer’s runs from driving them out of business.

There serious panics in 1907 that made the banks bankrupt and this raised the alarm on the fragile banking system in the nation, and this led to Congress in 1913 to write the Federal Reserve Act. The Federal Reserve System addressed the banking panics that had existed within the economy. This responsibility is now charged with the several other broader assignments. Some of the responsibilities of the Federal Reserve include fostering a sound banking system and a healthy economy.

Since the creation of the Federal Reserve, several pieces of legislation have been enacted by Congress that guides the operations and conduct of the central bank. The Great Depression Congress passed on the Banking Act in 1935, and this established the Federal Open Market Committee (FOMC) as the Federal monetary policymaking body. The Federal Reserve Reform Act in the year 1977 was enacted in the period of surging inflation. The Full Employment and the Balanced Growth Act, that was approved in 1978 and was known informally as the Humphrey – Hawkins Act.

The Full Employment and Balance Growth Act ensured full employment as the second goal of monetary policy and it required the Federal system to report to the Congress on its policy twice in a year. In 2007-2008, The Congress passed a reform and a consumer protection Act of 2010.The law was known as the Dodd-Frank Act and it affected the Fed in several ways. It changed the Fed’s governance, increases its transparency, expands its regulatory responsibilities and finally transfers most of Fed consumer protection responsibilities to a new Consumer Financial Protection Bureau.

Today, the Federal Reserve responsibility has fallen into four general areas. First, it conducts the nation’s monetary policy through influencing money and the credit conditions in the economy in pursuit of full employment and the very stable prices. It also supervises and regulates the banks and the other necessary financial institutions to ensure the very safety and the soundness of the nation’s banking and financial system. In addition to this, it is to protect the credit rights of consumers. Thirdly, it is to maintain the stability of the financial system and contains a systematic risk which may arise in financial markets.

Currently, the Federal Reserve is critical in providing specific the much needed financial services to the government, financial institutions and the foreign official institutions. It is also used to effect and monitor the country’s foreign payment systems. The American colonists were very limited in using the European money, barter as their main means of exchange before the Independence from the British rule. This ineffective to them because people lacked faith in the colonial currency and the authority of the colonies to issue money was interrupted by their British rulers. The colonial banks were not always operating like the new banks. They did not always take deposits from the public or make the loans. They only issued the paper currency which was backed by land or the superior metals such as gold. Merchants and the other individuals were the primary sources of credit.

The Federal Reserve Banks are not part of the federal government, but they co-exist because of an act of Congress. Its primary purpose is to serve the American public. The Federal Reserve System is both private and public. The Board of Governors functions as an independent government agency making it too accessible to the public while the Federal Reserve Banks are set up like the private corporations making it a private sector. Member banks usually hold stock in the Federal Reserve Banks, and they earn dividends.

If the Federal Reserves’ money comes ultimately from the taxpayers, it can be understood as the public being charged interest on the banks’ own reserves. Reserves maintained for their private profit. The Federal Reserve’s income is derived from the interest on the U.S. government securities which had been acquired through open market operations. When the expenses have been paid, the Federal Reserve turns the best of its earnings over to the U.S. Treasury.

According to the Fed’s website, the control Congress has over the Federal Reserve is limited to: It is subject to oversight by Congress, which periodically reviews its activities and can fundamentally alter its responsibilities by statute. If the Federal Reserve was a federal agency, the government could issue U.S. legal tender directly, avoiding an unnecessary interest-bearing debt to the private middlemen who usually want to benefit without much sweat.

In summary, the Federal Reserve is the American central Bank that was created back in the year 1913 with the aim of achieving stability within the economy. The Federal Reserve has backings of various acts of Congress that anchor its main functions. It caters for the financial interests of the American people and promotes efficiency in the U.S. economy through setting the monetary policy within the country, initiating interventions that ensure the financial systems are stable, comes up with interventions to protect consumers of financial institutions and initiate community development, creating a payment and settlement system that is safe and efficient, and monitors and accesses the safety and soundness of other financial institutions within the economy.

The U.S Congress had enacted various Acts since the inception of the Federal Reserve to promote its sound management and facilitate its efficiency. Some of the acts of Congress in regards to the Federal Reserve include The Full Employment Growth Act that entrenched the full employment as the essential goal of the Federal reserve’ monetary reserve and mandated the Federal System to submit reports to the Congress twice each year. The Consumer Protection Act of 2010 that ensured several changes were made to the Federal Reserve like the establishment of the Consumer Financial Protection Bureau, promoting transparency and expanded the agency’s regulatory responsibilities.

References

Ihrig, J. E., E. E. Meade, and G. C. Weinbach. “Monetary Policy 101: A Primer on the Fed’s Changing Approach to Policy Implementation, Board of Governors of the Federal Reserve System Discussion Series 2015-047.” (2015).

Jaremski, Matthew, and David C. Wheelock. “Banker preferences, interbank connections, and the enduring structure of the Federal Reserve System.” Explorations in Economic History 66 (2017): 21-43.

Mongelli, Francesco Paolo, Jung-Duk Lichtenberger, and Dieter Gerdesmeier. “A Brief Comparison of the Eurosystem, the US Federal Reserve System, and the Bank of Japan.” Elements of the Euro Area. Routledge, 2018. 53-72.

Wiles, William W. “Federal Reserve System.” System (2015).