Federal Reserve System

The Federal Reserve is the central bank of the United States, issuing currency, directing monetary policy, and supervising commercial banks in the country. The Fed, as it is often called, is a uniquely American institution that was created in 1913 after a series of financial panics and bank failures. Given the long history of distrust in centralized control of political and economic policy in the United States, Congress created the Federal Reserve System, an independent agency, to oversee commercial banks and coordinate monetary matters in the country.
The key word in the Federal Reserve System is system. Unlike most industrialized countries where control of banking and monetary policy is a cabinet-level function within the central government, the United States has a decentralized, semiautonomous system to direct these critical economic functions. The three important parts of the Fed are the Board of Governors, Federal Reserve Banks, and Federal Open Market Committee.
The Board of Governors includes seven members, nominated by the president of the United States and confirmed by the U.S. Senate. The Board members serve 14- year terms, staggered so that a new appointment is made every two years. A two-term president nominates four member of the Board of Governors, and the chairperson of Board of Governors is appointed by the president for a four-year term. In recent times the president has frequently renewed that appointment. The chairman of the Federal Reserve has considerable influence and is often referred to as “the second most important person in Washington.”
There are 12 Federal Reserve District Banks in the system. Located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, these banks are technically separate corporations owned by their members, commercial banks in each district. All national banks—banks given a charter to operate by the Comptroller of the Currency in the U.S. Treasury—and some statechartered banks in each district purchase shares in their District Federal Reserve Bank. The members of each district bank elect a board of directors who then appoint a district bank president.
Together, the Fed’s Board of Governors and five of the 12 Federal Reserve District Bank presidents form the Federal Open Market Committee (FOMC). The FOMC, whose goals are to maintain price stability and support economic growth, meets on a regular basis in Washington and directs monetary policy. Its primary activity, open-market operations, involves buying and selling government securities in order to increase or decrease the money supply in the economy.
The Fed’s monetary-policy decisions, which affect all Americans and many other people around the world, are made in secrecy by seven people, appointed by the President for long terms, and five Federal Reserve District Bank presidents. Some people argue that monetary policy is too important to be left in the hands of this group of bankers and economists largely removed from the democratic process. Others have argued that monetary policy is too important to be left in the hands of politicians. However, critics and supporters of the Federal Reserve System have generally complimented the Fed’s decisions and leadership in recent years.
See also discount rate; money.