Federal Reserve System, History, Structure, Function

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 sy

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986). The Reserve banks and the regulators are guided to achieve objectives established by the fundamental purposes of the Federal Reserve System. Functions. The objectives and activities of the Federal Reserve System have evolved over the years, as understanding about the role of monetary policy in a modern economy has developed. The environment for the system's operation was drastically changed by World War I, the Great Depression, World War II, the Korean War, and subsequent years (Libby, 1987, p. 701). World War I greatly increased the national debt and weakened the international gold standard (Libby, 1987, p. 701). Federal Reserve banks extended a large quantity of loans to member banks to help them buy government securities, an operation that aided Treasury finance but also increased the quantity of money and aggravated price inflation. Shortly after the war, the system's efforts to stop a gold outflow by tightening credit helped bring on a sharp economic recession in 1920. Consequently, Federal Reserve authorities learned the important influence of open market operations on bank reserve positions (Greider, 1987). They refined the practice of raising the discount rates (The discount rate is the interest rate charge
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Approximate Pages = 10 (250 words per page)

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