The Federal Reserve, simply put, is the central banking system for the United States. The Federal Reserve is ran by an appointed board of governors, and is located in Washington, D.C. These individuals are chosen by the acting President. The Federal Reserve itself is composed of the Board of Governors, an Open Market Committee, and 12 regional Federal Reserve Banks. These banks act as agents to the U.S. Treasury.
Central banking was an idea iniated by Alexander Hamilton. The concept was born after several bank panics which caused a demand for a central banking system. The idea wasn't without conflict, but eventually won and was finally realized in 1863 by The National Banking Act.
The Federal Reserve is considered the bank's bank and the government's bank. The main goal of the federal reserve is to protect the nations money. It does this with several functions. One is a check cashing system. During times of economical uncertainty, a lot of private banks refuse to honor checks drawn from other banks. The check cashing system in essence allows banks to cash these checks without fear of loosing money.
Another function of the Federal Reserve is to act as a last resort lender to other financial institutions. This ensures that private banks can stay in business, and still have the money it needs to operate. The Federal Reserve is basically the bank of banks. Because of this, the Federal Reserve operates the U.S. Mint and is responsible for all the money paid into and from the United States Government.
The Board of Governors in the Federal Reserve system controls how private banks operate. This function keeps for profit banks in check by placing limitations on what they can do. The Federal Reserve system monitors for profit banks to ensure that you, the consumer, is treated fairly and not over charged for banking services. The Federal Reserve also acts as an insurance policy by helping you to recoup losses if your private bank fails.
The Federal Reserve also plays a role in the nations payment system. The Federal Reserve Bank provides services to both depository institutions and to the federal government. Depository systems maintain accounts and provide various payment services. Some of these include check cashing and electronic transfers of funds. The federal government uses the Reserve for all their banking needs. This includes all payments sent and received by the government and the issuing, transferring, and redeeming of U.S. government securities.
The Federal Reserve is self funded. This means that the Reserve operates on money that it makes itself. The Reserve makes money on services it renders, such as check cashing and electronic transfer fees. It also makes money on Open Market Operations. These include interest on Treasury securities and the buying/selling of securities.
Each week, the Board of Governors publish a Consolidated Statement of Condition of All Federal Reserve Banks. This shows the condition of all 12 Federal Reserve banks on one printed statement. The purpose of this is to show how our nations funds are being handled, thus making it easier to forsee an problems that may arise.
The Federal Reserve system as been the target of debate since it's beginning and continues to be criticized by some. Some claim that a central banking system is unnecessary and counterproductive to the economy. Some argue that the Reserve should not have the control that it does. Some even claim that a lot of the Reserves practices are kept secret, having a negative impact on the economy because of misappropriation of funds. The Federal Reserve has systems in place to address and handle these claims.
Whether you support or oppose a central banking system, the Federal Reserve has persevered. The ideas and practices of the Federal Reserve have remained intact, and obviously, the system works. The Federal Reserve handles all of the nations money and controls the nations private banks, all with fail safes for protecting them.
