History of the Federal Reserve

The Federal Reserve System (basically recognised as the Federal Reserve or just it can be called as the Fed) is the United States of America’s central banking system. After a series of financial panics (especially the panic of 1907) led to a need for central control of the monetary system in order to relieve financial crises, the Federal Reserve Act was enacted on December 23, 1913. The Federal Reserve System’s roles and responsibilities have been enlarged over time as a result of events such as the Great Depression in the 1930s and the Great Recession in the 2000s.

The Federal Reserve Board is managed by a board of governors selected by the president (FRB). Twelve regional Federal Reserve Banks manage and supervise privately owned commercial banks across the country. Commercial banks with national charters are required to own shares in the Federal Reserve Bank of their area and can elect some board members.

The federal government determines the salary of the board’s seven governors and receives all of the system’s annual revenues after dividends on member banks’ capital investments are paid and an account surplus is maintained. In 2015, the Federal Reserve generated $100.2 billion in net revenue and transferred $97.7 billion to the Treasury; in 2020, earnings are expected to be around $88.6 billion, with $86.9 billion in remittances to the Treasury. The Federal Reserve System considers itself a “independent central bank” because “its monetary policies do not have to be approved by the President or anyone else in the executive or legislative branches of government,” “it does not receive funding appropriated by Congress,” and “the terms of the board members of governors span multiple presidential and congressional terms.”

History of Federal Reserve:

During the American Revolutionary War, the first effort at a national currency was made. The Continental Congress, together with the states, began printing paper currency in 1775, dubbed “Continentals.” The Continentals were solely supported by future tax money and were employed to assist fund the Revolutionary War. The value of the Continental was swiftly depreciated due to overprinting and British counterfeiting. On August 16, 1787, the United States removed the capacity to issue Bills of Credit (paper money) from a draught of the new Constitution, as well as prohibiting such issuance by the states and limiting the states’ ability to make anything other than gold or silver coin legal tender on August 28.

The government handed the First Bank of the United States a charter in 1791, allowing it to function as the country’s central bank until 1811. President Madison’s First Bank of the United States came to an end when Congress refused to renew its charter. The Second Bank of the United States was founded in 1816 and lost its capacity to be the country’s central bank when its charter expired under President Andrew Jackson twenty years later. The Bank of England served as the foundation for both banks. In 1913, a third national bank, the Federal Reserve, was founded, and it continues to function today.

Monetary policy:

The term “monetary policy” refers to the activities taken by a central bank, such as the Federal Reserve, to impact the availability and cost of money and credit in order to help in the achievement of national economic objectives. What happens to money and credit has an impact on interest rates (the cost of credit) and an economy’s success. The Federal Reserve Act of 1913 empowered the Fed to make monetary policy in the United States.

Interbank lending:

The Federal Reserve influences the federal funds rate, which is the rate at which banks lend surplus reserves to one another. The interbank market determines the rate that banks charge each other for these loans, and the Federal Reserve impacts this rate using the three “tools” of monetary policy detailed in the Tools section below. The FOMC focuses on the federal funds rate, a short-term interest rate that affects longer-term interest rates throughout the economy. In 2005, the Federal Reserve summed up its monetary policy as follows:

“The Federal Reserve implements US monetary policy by influencing market conditions for Federal Reserve Bank balances held by depository institutions. The Federal Reserve exerts significant control over the demand for and supply of Federal Reserve balances, as well as the federal funds rate, by conducting open market operations, imposing reserve requirements, allowing depository institutions to hold contractual clearing balances, and extending credit through its discount window facility. The Federal Reserve is able to establish financial and monetary circumstances that are consistent with its monetary policy objectives by controlling the federal funds rate”.

The economy is influenced by the amount of reserves that banks utilise to issue loans. Policy acts that increase banking system reserves stimulate lending at lower interest rates, boosting money, credit, and economic growth. Reserve-absorbing policies work in the opposite direction. The Fed’s job is to provide enough reserves to support an appropriate quantity of money and credit while preventing inflationary excesses and shortages that hinder economic progress.

Conclusion

Following the United States’ entry into World War II in 1942, the Federal Reserve System made a legal commitment to keep government bond interest rates low. The Federal Reserve System (often known as the Fed or just the Fed) is the central banking system of the United States of America.The Federal Reserve System’s roles and responsibilities have been enlarged over time as a result of events such as the Great Depression in the 1930s and the Great Recession in the 2000s.

The Federal Reserve System is divided into several levels. The president appoints a board of governors to run the Federal Reserve Board (FRB). Commercial banks with national charters are required to own shares in the Federal Reserve Bank of their region and can elect some board members.During the American Revolutionary War, the first effort at a national currency was made.