The federal reserve system



The Federal Reserve System

I would like to start this paper by giving a clear definition of the federal reserve system: The Federal Reserve System most well known as “the Fed” is the central banking system and monetary authority of the United States. The Fed is made up of regional Federal Reserve banks and the Federal Reserve Board of Governors, which their main responsibility is to supervise and to examine the state-chartered member banks, also to regulate banks holding companies, and finally to be responsible for the conduct of the monetary policy. Furthermore, some of the most important duties of the Fed are to keep full employment and to maintain a low state of inflation (CPI= 2%).
In order to clearly understand this concept and its purpose, it is also necessary to give a clear definition of the word money. As stated in the Webster dictionary, money is: “A commodity, such as gold, or an officially issued coin or paper note that is legally established as an exchangeable equivalent of all other commodities, such as goods and services, and is used as a measure of their comparative values on the market.” Money has three basic functions: a medium of exchange, a measure of value, and a store of value. Goods and services are paid for in money and debts are brought upon and then paid off in money. Without money, economic transactions would have to take place on a trading basis. In conclusion, money is a good thing for Humanity. It frees people from spending too much time running around exchanging goods and services and allows them to undertake other activities such as pleasure, production, relaxation, contemplation, and temptation.
Back in the early nineteenth century the United States was experiencing a major national banking crisis. One of the most remembered crises of the United States history was the Banking Panic of 1907. Abram P. Andrew, secretary of the National Monetary Commission collected nearly two hundred samples of different bank currencies created to stem the 1907 panic, and he provided a description of the banks\' problems at that time. The banks were so singularly unrelated and independent of each other that the majority of them had simultaneously engaged in a life and death contest with each other, forgetting for the time being the solidarity of their mutual interest and their common responsibility to the community at large.
Two-thirds of the banks of the country entered upon an internecine struggle to obtain cash, had ceased to extend credit to their customers, had suspended cash payments and were hoarding such money as they had. What was the result? Thousands of men were thrown out of work, thousands of firms went into bankruptcy, the trade of the country came to a standstill, and all this happened simply because the credit system of the country had ceased to operate. With all of the troubles that the banking system was experiencing, President Woodrow Wilson passed an act in 1913 that established the Federal Reserve System (the Fed). Passing that act was the most drastic banking reform in the country\'s history.
The Federal Reserve Act of 1913 was made to serve as a lender-of-last-resort in times of crisis and to provide a national currency that would expand and contract as needed. A seven member Board of Governors was established to the Fed. They are usually bankers or economic specialists that are appointed by the President with the advice and consent of the Senate to 14-year terms. The terms are so long so that the members are protected from all of the political material that goes on. The President then selects a chairman of the board who is the chief spokesperson of the Fed. As we all know, the current chairman is Alan Greenspan. He is the most powerful person in the world concerning monetary policies. There is a famous saying that “when Alan Greenspan speaks, Wall Street listens.” I personally believe that he is even more important than the president of the United States. Greenspan is the only person that has enough power to move billions and billions of dollars with just a simple speech. The Federal Reserve System is also dubbed with the name The Central Bank of the United States.
Today, the Fed is comprised of twelve regional Federal Reserve