Federal Reserve

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The Federal Reserve (Also known as the Federal Reserve System or The Fed) is the United State's central banking system. It was created in 1913 by the Reserve Act. It was initially created to smooth out a series of local financial panics and gradually evolved into a privately-held corporation that oversees national monetary policy, banking regulation, national financial stability, and as a lender for other banks, the U.S. Government, and foreign entities.[1]

Decisions made by the Federal Reserve are not subject to the Executive or Legislative branches of government. It's authority is, however, derived from the U.S. Congress. Board Members of the Federal Reserve are chosen by the President and confirmed by Congress. All profits made by the Federal Reserve System are transferred to the U.S. Government.


The vast majority of American history enjoyed sufficient economic growth, immigration diversity, civil tolerance, and technological advancement without the presence of a central banking authority. Nonetheless, the Founding Fathers debated consistently over the validity of forming a nationalized banking system. George Washington and Alexander Hamilton pushed to create a temporary charter for the First Bank of the United States, while Thomas Jefferson and James Madison opposed the action. [2] A oft-quoted description of Jefferson's feelings about banks: [3]

“And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; 
and that the principle of spending money to be paid by posterity, under the name of funding, is but 
swindling futurity on a large scale.”

Over the next 100 years, each time the nation's money supply contracted, a larger, less-regulated, and more powerful banking industry was seen as the solution. A Second and Third Central Bank were chartered with more autonomy to handle financial matters. [4]

At the beginning of World War I, the gold standard collapsed for the United Kingdom and the rest of the British Empire. The rest of the planet, no longer able to access a vast world of resources with the ease of a single currency, were left with the task of having to manage and monitor their own currency and exchange rates. The Era of Central Banking was born. [5]

In 1913, the John D. Rockefeller, Jr.'s father-in-law, Nelson Aldrich[6], began to lay the groundwork to establish a permanent Central Bank in the United States. The plans were initially rejected as they were seen by rural and western states as favoring the industrial East Coast at their expense. However, with the support of Democrats who wanted a banking system that could oppose Wall Street, the act was passed.


The Federal Reserve has the following powers:

  • Expand money supply: This promotes short-term employment at the expense of diminishing the value of dollars already in circulation.
  • Contract money supply: This promotes short-term unemployment at the expense of increasing the demand for dollars.
  • Central authority on check-clearing: When massive bank failures occur, they won't take each other's checks. The Federal Reserve acts as a Central authority on all check clearance to ensure this financial channel remains open.
  • Lender of Last Resort: Extending credit to entities of the Federal Reserve's choosing, usually under the explanation that the entity is of financial value to the entire system. This expands the money supply.
  • Bank liquidity for short-term operations: Banks trade between each other every day in an elaborate shell game to fund their operations. The Federal Reserve injects money into this system of exchange to keep it, and thus banks, stable. The Fed charges a rate for money injected, which the bank pays for at a later date.
  • Manages the U.S. Treasury's checking account
  • Selling and redeeming bonds, T-bills, and other U.S. Government securities.
  • Issuance of the U.S.'s coin and paper currency.
  • Adjusting the rates in which banks lend federal funds to each other: This is the primary mechanism in which the Federal Reserve dictates monetary policy. When they reduce their rates for cash injection, the banks are more prone to letting go of some of that money in the form of loans. When the Fed ups the rate, banks have to hustle to just to cover their daily cost of operation. In this case, loan requirements are more strict and less loans are offered.
  • Regulation of the banking industry.
  • Immunity to the following kinds of auditing:
    • Transactions for or with a foreign central bank or government (or non-private international financing organization): Whatever the Fed does overseas, we'll never know.
    • Deliberations, decisions, or actions on monetary policy matters: Whatever the Fed decides, we'll never know.
    • Transactions made under the direction of the Federal Open Market committee: Whatever the Fed does to adjust bank liquidity rates, we'll never know.
    • A part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to the previous immunities: Whatever the Fed does, we'll never know.
  • Immunity to the Torts Claim Act: The Federal Reserve cannot be sued for damages it may have caused to the general public.
  • Act as a privately-owned federal agency: Allows for flexible positioning to ensure its authority even in the event of new legislation.
  • Set monetary policy: Those dollars you work for all the time? The Federal Reserve determines how much you want it.
  • Adjust reserve requirements for depository institutions: Banks must hold a set number of reserves in place in order to operate under the Federal Reserve System. Adjusting these holdings adjust the behavior of bank lending. Increasing holding requirements increases loan rates. Decreasing does the opposite.
  • Lend money to primary dealers: Once considered a great sin of central banking, the Paulson Plan has allowed the Federal Reserve to allow lending directly to Merill Lynch, Barclays, BNP, Citigroup, Credit Suisse, J.P. Morgan, and other major investment banks in exchange for collateral, including mortgage backed loans. This means the Federal Reserve is setup to have direct ownership of almost everything that the banks own the second they think they may lose money on it.
  • Offer loans to the U.S. Government at negative interest: This means that the Federal Reserve pays the U.S. Government to accumulate debt.
  • As of March 2009, possess $247.8 billion in gold.
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