The purpose of this paper is to examine the Federal Reserve System, the central banking system of the United States. The evolution and history of the Federal Reserve System is first discussed, followed by the administrative structure and the functions of the Federal Reserve System. A primary function of the Federal Reserve System is to establish monetary policy. Thus, the role of the Federal Reserve System in establishing monetary policy is reviewed. Discussion concludes with the impact of political and public pressure imposed upon the Federal Reserve System.
Prior to the twentieth century, the United States lacked a central bank (Livingston, 1986). The country's economic and territorial expansion was financed by a decentralized system of thousands of unit banks, each operating in a relatively small area. Individual banks maintained cash reserves in their own vaults or on deposit with other commercial banks. Periodically, loss of confidence by depositors led to bank panics. If the banks did not have enough currency to meet the demands, there was no immediate source from which to obtain more; currency was based on such assets as gold, silver, and government bonds, none of which permitted an increase in the money supply to meet panic demands (de Saint Phalle, 1985).
The Federal Reserve System was established to eliminate bank panics (de Saint Phalle, 1985). The law creating the Federal Reserve System was adopted on 23 December 1913, and the system began operating in 1914 under the Federal Reserve Act. The system was authorized to issue a new type of currency, Federal Reserve notes. The Federal Reserve member banks were authorized to resell [to Reserve banks] promissory notes they had received in making certain loans. Allegedly, such practices furnished member banks with added currency needed in a crisis. Such added currency, since 1959, qualified as legal reserves (Member banks were also required to hold their reserve...