Federal Reserve banking system

The Federal Reserve System is the Central Bank of the United States Historically , people used to store their money in the form of gold which would be deposited with a Goldsmith , who would give them a receipt in return to the gold , thus a Goldsmith performed some of the major functions that banks perform today

It was founded in 1913 by an act of Congress (to which major reforms were added in the 1930s , the Fed is therefore the Central Bank of United States . The Fed is a complicated institution with many

responsibilities , including the regulation and supervision of over 8000 commercial banks

The Board of Governors are the most important people within the Federal Reserve System . The board consists of seven members , each appointed for 14 years by the President of the US . The chair of the Fed , who is appointed by the President and whose term runs for 4 years , usually dominates the entire Federal Reserve . The Fed is an independent agency and it does not take s from the Congress or the President

The United States is divided into 12 Federal Reserve districts , each with its own Federal Reserve Bank . The district banks are like branch offices of the Fed , where they carry out the implementation of the rules and regulations , and functions of the central system in their districts and report to the Board of Governors on local economic conditions

Private banks loan out money , which actually means they create money and the Fed or the Federal Reserve System is available as a supervisory body , which ensures protection to banks incase a run on bank occurs However , the major function of the Fed is the controlling of the money supply , which affects the interest rates and thus controlling the entire economy

The private banks are not free to create money by making loans at will Their ability to create money is controlled by the volume of reserves in the system , which is controlled by the Fed . The Fed , therefore has the ultimate control over the money supply (Case and Fair 490

The behavior of the Fed concerning the money supply is formally set by the Federal Open Market Committee (FOMC . The FOMC consists of the seven members of the Fed 's Board of Governors , the president of the New York Federal reserve bank , and , on a rotating basis , four of the presidents of the 11 other district banks . The FOMC sets goals concerning the money supply and interest rates , and it directs the Open Market Desk in the New York Federal Reserve Bank to buy and /or sell government securities (Mankiw 335

Although from a macroeconomic point of view the Fed 's crucial role is to control the money supply , the Fed also performs several important functions for commercial banks . These functions include clearing inter-bank payments , regulating the banking systems , and assisting banks in a difficult financial position . The Fed is also responsible for managing exchange rates and the nation 's foreign exchange reserves . In addition...