US Federal Reserve: History and Functions

The Federal Reserve System, created with the passing of the Federal Reserve Act on December 23, 1913, is the central banking system of the United States. The Federal Reserve System, popularly known as simply the Fed, was created with the expectation that centralized, regulated control over the country's monetary system would help mitigate or prevent financial crises like the Panic of 1907.

By creating the Fed, Congress sought to maximize employment, stabilize the prices of goods and services, and mitigate the long-term effects of interest rate changes. Such organizations as Payday Depot emerged lately as a part of the whole financial system of the country.

Early American Banking: 1791–1863

Banking in America in 1863 was far from simple and unreliable:

· The First Bank (1791-1811) and Second Bank (1816-1836) of the United States were the only official representatives of the US Treasury and the only sources that issued and provided official US money.

· All other banks were run by state charter or private individuals. Each bank issued its banknote.

· All public and private banks competed with each other and with the two US banks to make sure their notes could be redeemed at full face value. When you traveled around the country, you never knew exactly what kind of money you would receive in local banks.

With the growth of America's population, its mobility, and economic activity, this multitude of banks and types of money soon became chaotic and unmanageable.

National Banks: 1863–1913

In 1863, the US Congress passed the first national banking law, providing for a controlled system of national banks. The law set operating standards for banks, set minimum amounts of capital that banks were required to hold, and defined how banks were to make and manage loans.

In addition, the Law introduced a 10% tax on government banknotes, which effectively eliminated non-federal currency from circulation.

1913: Creation of the Federal Reserve System

By 1913, the US economic growth both at home and abroad required a more flexible but better controlled and more secure banking system. The Federal Reserve Act of 1913 launched the Fed system as the central banking organization of the country.

In accordance with the Federal Reserve Act of 1913 and amendments made over the years, the Federal Reserve System:

· Conducts America's monetary policy.

· Supervises and regulates banks and consumer credits.

· Maintains the stability of America's financial system.

· Provides financial services to the United States federal government, the public, and foreign financial institutions.

The Federal Reserve makes loans to commercial banks and is authorized to issue Federal Reserve Notes, which make up America's entire supply of paper money.

Any bank that uses the phrase National Bank in its name must be a member of the Federal Reserve System. They must maintain a minimum level of reserves at one of the 12 Federal Reserve Banks and must pay interest on their customers' savings accounts and checking account deposits at a Federal Reserve Bank.

All banks incorporated under the national charter are required to become members of the Federal Reserve System. Banks registered under state statutes may also apply for Federal Reserve membership.