What is the Federal Reserve?

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fact-finder | (Level 3) Valedictorian

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The Federal Reserve is the central banking system in the United States. When the National Bank Act of 1863 proved to be ineffective in managing the nation's banking system, Congress (the law-making body of the United States) passed the Federal Reserve Act in 1913. This act created twelve regional federal reserve banks located in Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The banks operate as "bankers' banks," supplying funds to member banks in the same way that consumers use their accounts at commercial banks. Although all national banks must be members of the Federal Reserve system, state banks may join the Federal Reserve only if they meet certain requirements. A Board of Governors, a seven-member body appointed by the president of the United States, supervises the Federal Reserve system.

The Federal Reserve lends money to commercial member banks and directs the member banks' selling of U.S. government securities (bonds sold to raise money) that are backed by the taxing power of the government. It determines how much money needs to be in the U.S. Treasury and regulates the interest rates the Federal Reserve charges member banks for loans it makes to them. The Federal Reserve also issues the national currency (paper money and coins).

Further Information: Armentrout, Patricia. Protecting Money. Vero Beach, Fla.: Rourke, 1996; Lindsey, Lawrence B. "Should the Fed Be Reformed?" World and I. April, 1999, p. 44; U.S. Government. Board of Governors of the Federal Reserve System. [Online] Available http://www.bog.frb.fed.us/, October 30, 2000.

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truthseekah | (Level 1) Salutatorian

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The Federal Reserve was set up by elite bankers to create and control the fiat currency of the US enjoys today.  Since established in 1913 the Fed has increased inflation and the national debt exponentially, something those who pushed the Act through Congress said it would eliminate.

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

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The Federal Reserve System in the USA, also nicknamed FED, is the central banking system of USA. It supervises most of the banking institutions in the country. It was set up under Federal Reserve Act. It controls supply of money and credit. It works through a network of Federal Reserve districts and branches.

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nikoned | College Teacher | eNotes Newbie

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The Fed

The Government's Bank

The Federal Reserve acts as the banker for the U.S. In this role, the Federal Reserve maintains the Treasury Department's checking account and clears U.S. Treasury checks. The Fed processes a wide range of electronic payments for the government, such as Social Security and payroll checks. The Fed also issues, transfers, and redeems U.S. Treasury securities and conducts Treasury securities sales.

Regulator -The Federal Reserve and state and federal agencies supervise and regulate the nation's financial institutions to ensure their financial soundness and compliance with banking, consumer, and other applicable laws.

Lender-The Federal Reserve provides credit to depository institutions to help them adjust to temporary, unexpected changes in their deposits or loan portfolios.

The Fed serves as the lender of last resort to the nation's banks. The Fed may assist banks that are basically healthy but need help to see them through temporary credit problems.

Monetary Policy-The country's economic performance is influenced by many factors--economic performance abroad, fiscal policy determined by the legislative and executive branches of government, and monetary policy carried out by the FED.

The Fed's keyrole is to keep the economy healthy through monetary policy. Monetary policy influences the country's economic performance to promote stable prices, maximum employment, and economic growth.


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