The Federal Reserve is one of the two most important central banks in the world, along with the Bank of Japan. As a central bank, it is charged with steering the monetary policies of the U.S. economy. There is considerable disagreement about the effectiveness of the Federal Reserve in pursuing this mission, and there are also different theories offered as to how a central bank can be structured best to be effective.
The Federal Reserve System was formed by an act of Congress in 1913 and was to function as a central bank for the government and the people of the United States. In these functions, the Federal Reserve remains one of the most powerful institutions in American society, influencing the growth of the money supply, affecting interest rates, and playing a large roll in the pace and direction of spending by every citizen and every business (Taylor, 1989, 15). In addition to the 12 district banks, there are some 5,500 private member banks in the Federal Reserve System. Member banks elect six of the nine directors of their district bank, and they in turn recommend some of the people who sit on the two committees in Washington to make or advise on policy for the entire system. As noted, the President appoints the seven members of the board's system of governors, one of whom acts as its chairman for four years. Only about 40 percent of the private banks in the nation belong to the Federal Reserve System (Taylor, 1989, 17).
On paper at least, the Federal Reserve is such an independent entity, though there are those who doubt that it is as politically insulated as it is supposed to be. The Federal Reserve is run by a board of seven governors appointed by the president. The chairman, also selected by the president, has a four-year, renewable term, while the other six have 14-year terms, with one member retiring every two years. If a governor should retire early, his successor takes over for what remains of his ter...