The Federal Reserve System

The Federal Reserve System was created in 1913 in order to provide elastic money supply, especially during the harvesting seasons, to meet the farmers’ demands for short-term loans. The Federal Reserve System was to meet these seasonal demands for money through the reserve balances of commercial banks.

Soon after its creation, the Federal Reserve System proved to become an important means ensuring full employment, price level stability, and economic growth, all these three being the most essential purposes of monetary policies. In recent years, besides, the latter are known to have been pursued for one more purpose-to avoid budget deficit.

To ensure efficient functioning of the Federal Reserve System, the territory of the United States was divided into twelve Federal Reserved districts, each one having Federal Reserve Bank. Ten of the twelve Reserve Banks have branch offices.

Central coordination is provided by the board of Governors in Washington, D.C. Thus, the Federal Reserve System is a national system that is well adjusted to local economic conditions. Handling daily transactions with banks in its territory, each Reserve Bank maintains close contacts with the local business community.

Unlike commercial banks, Federal Reserved Banks are not operated for profit. To serve the community is their function. The shares of federal Reserve Banks are held by member banks.

Each Federal Bank is managed by nine directors, three of which, bankers themselves, represent member banks, three are local businessmen and three, not in any way connected with the banking industry, are appointed by the Board of Governors in Washington. Thus, the fact that six of the nine are non-bankers ensures that the Federal Reserve System, at least on a regional level, can be used to balance the interests of the banking industry and those of the public.

The board of directors appoints the officers who are given the responsibility for the daily operations of the Reserve Banks.

Members of the Board of Governors are appointed by the US President, which is ratified by the Senate. The Board of Governors has budgetary control over the Reserve Banks, provides annual audit of all of them and their branches. It is also responsible for changes in reserve requirements.

Federal Open Market Committee, responsible for open market operations, is also included in the Federal Reserve System. All presidents of the Reserve Banks are invited to the Open Market Committee meetings which are held once a month. On the one hand, it lets presidents better understand policies adopted by the Committee. On the other hand, it lets Committee members receive first-hand information of tendencies in all parts of the Federal Reserve System.

In addition to changes in reserve requirements and open market operations, another main monetary policy is the change of discount rates. Requests for such a change normally come from the Reserve Banks, but the decisions are made by the Board of Governors.

Hence, the twelve Federal Reserve Banks, the Board of Governors, and the Open Market Committee make up the main administrative and policy-making units of the Federal Reserve System.

However, without its member banks, the Federal Reserve System will be as important as a university without students. Not all commercial banks in the United States – actually, not even half of them – are members of the Federal Reserve System, but almost all large banks are. As a result, 42 percent of all commercial member banks produce more than 80 percent of the chequing accounts in the country.

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