FEDERAL RESERVE SYSTEM

The Federal Reserve System, also known simply as "the Fed," is a U.S. central bank. Its primary role is to influence the amount of money and credit circulating in the economy in order to promote full employment, stable prices, and economic growth. It also regulates and supervises the U.S. banking industry, distributes currency and coins, clears checks, and handles some electronic funds transfers. Unlike traditional banks, the Fed's purpose is not to make a profit but to serve the national interest. Moreover, its customers are not individual citizens but the roughly 4,300 banks that make up its members. The Fed is governed by a sevenmember Board of Governors appointed by the President of the United States and it is led by the Board's chairperson, who since 1987 has been Alan Greenspan(1926—). Although the Board determines the Fed's policies, the twelve district Federal Reserve banks, located in major cities across the United States, perform its day-to-day operations.

The Federal Reserve System came into being after four financial panics destabilized the U.S. economy between 1873 and 1907. Congress established the National Monetary Commission to determine what made the U.S. banking system so susceptible to these periodic crashes. The commission's report led directly to the Federal Reserve Act of 1913, which created the Federal Reserve System. Initially, the Fed performed only the narrow functions of lending money to banks when they could not get loans elsewhere, supervising the banking industry, and increasing or decreasing the money and credit supply in response to changing economic conditions. However, many believed that the Great Depression of the 1930s occurred in part because the Fed did not provide banks with enough reserves to make loans that would have increased the money supply and kept the economy from contracting. In response, Congress passed the Banking Act of 1935 to give the Fed greater controls over the minimum amount of reserves each member bank needed to make loans. The Full Employment Act of 1946 empowered the Fed to make full employment and stable prices explicit goals of its policy, and the Full Employment and Balanced Growth Act of 1978 required that the Fed publicly state what the objectives of its monetary and credit policies are. In the 1980s, under President Ronald Reagan (1981–1989), the Fed adopted a monetary policy of maintaining specific rates of growth in the money supply.

See also: Central Bank, Federal Reserve Act of 1913, Financial Panic, Alan Greenspan