The Federal Reserve System
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The Federal Reserve Bank System has two main functions. One function is to hold deposits for commercial banks and operate a nationwide check-clearing system. The second function is to serve as the controller of credit in the U.S. economy. The Federal Reserve Bank System accomplishes this second function by determining the size of the money supply and the ease or difficulty of borrowing. The Federal Reserve carries out its functions through 12 privately controlled separate central banks located throughout the United States. Each central bank serves a designated district. The Federal Reserve is controlled by a board of governors. One of the governors is appointed as chairperson by the president. Currently, Alan Greenspan is the chairperson of the board of governors of the Federal Reserve Bank System. Members of the Federal Reserve Board and the presidents of the 12 Federal Reserve banks control the issuance of paper currency and coins, regulate the banks that are members of the Federal Reserve Bank System, decide which member banks may establish branches or buy other banks, and regulate the operations of bank-holding companies. This group also determines monetary policy. Monetary policy affects interest rates and money supply. Indirectly, this can influence the level of economic activity, unemployment, and inflation in the country. The Federal Reserve influences monetary policy by controlling three areas: reserve requirements, the discount rate, and open marke
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ment increases as total deposits in the country increase. By 1995, the federal reserve minimum was $4.3 million under Garn-St. Germain and $52 million under MCA (FRB, ND, p. l).
Monetary policy is implemented primarily by changing the size of the reserves. By raising legal reserve requirements, the Federal Reserve reduces the amount of money supply generating by the banking system. Credit is tightened as a result of this action. When reserve requirements are lowered, the money supply can increase. However, Fedpoint 45 indicates that, in practice, the connection between reserve requirements and money creation is not as strong as may have been suggested (FRB, nd, p. 2).
Fedpoint 45 covers reserve requirements adequately but not in depth. While the article acknowledges that the Federal Reserve's influence on money creation and monetary policy may not be as strong as many might believe, the article fails to mention the impact of factors outside the Federal Reserve, such as commercial banking, other financial markets, and the economy, on monetary policy.
The Federal Reserve and its board chairperson have been a major topic in the financial news for several reasons. Last year, the Senate Committee on Banking evaluated
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Approximate Word count = 1378
Approximate Pages = 6 (250 words per page)
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