What is the Federal Reserve and How Did It Come Into Existence?

The Federal Reserve System serves as the central bank of the United States.

The Fed was create by the Federal Reserve Act of 1913.

The stated purpose of the legislation was to “provide the nation with a safer, more flexible, and more stable monetary and financial system.”

In the years since its founding, the Fed’s role in banking and the economy has expanded exponentially.

Federal law sets out the purposes, structure, and functions of the system as well as outlines aspects of its operations and accountability. Congress established three key objectives for monetary policy in the Federal Reserve Act:

1. Maximizing employment
2. Stabilizing prices
3. Moderating long-term interest rates.

Congress left itself the power to amend the Federal Reserve Act.

The system is composed of a central governing body – the Board of Governors – headquartered in Washington, D.C., and 12 regional Federal Reserve Banks, located in major cities throughout the U.S.

According to the Federal Reserve’s website, it performs five general functions.

– Conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;

– Promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;

– Promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
– Fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and

– Promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.

The Federal Reserve does not receive government funding. It technically operates as a for-profit corporation. The Fed derives its income primarily from the interest on government bonds that it buys through open market operations. After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.

The Fed exercises significant control over the U.S. banking system. For example, member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6 percent of their capital and surplus. It’s nothing like being a stockholder in a public company. Holding the stock doesn’t confer any kind of control over the Fed.

Every commercial bank in the U.S. must hold “reserve” funds at the Fed equal to a percentage of its outstanding deposit liabilities. It also serves as the “lender of last resort” for banking institutions that cannot obtain funds elsewhere. This is supposed to prevent the collapse of banks and other financial institutions that could threaten the stability of the U.S. economy.

The Federal Reserve serves a number of other functions. It runs the check clearing system in the U.S., regulates private banks, and, as already mentioned, runs the country’s monetary policy.

The Treasury Department’s checking account with the Fed handles all of the federal government’s incoming deposits along with outgoing payments.

ORIGINS

The Federal Reserve was originally sold as a way to protect against “bank runs” by providing liquidity to the banking system. But in reality, it was conjured up by politicians and politically connected bankers as a way to micromanage the economy, empower the government, and ultimately put more money into the pockets of said bankers and politicians.

The origins of the Fed are pretty shady.

The central bank was conceived during a secret meeting at a private club on Jekyll Island, Georgia. According to an NPR article, Sen. Nelson Aldrich, chairman of the Senate finance committee, organized the clandestine meeting.

“He told a handful of New York bankers to go on a given night, one by one, to a train station in New Jersey. There they would find a private rail car hitched to the back of a southbound train. To conceal their identities, Aldrich told the bankers to come dressed as duck hunters and to address each other only by first name.”

The attendees at this meeting hammered out a blueprint that became the Federal Reserve Act.

Is the Fed Private or Government?

What exactly is the Federal Reserve. Is it a government entity? Is it private?

Well, yes.

It’s a weird hybrid thing. But at its core, it is a government entity that supports the government.

A lot of people make a big deal out of the fact that the Fed is supposedly private. But the president appoints the Federal Reserve’s Board of Governors and they must be confirmed by the Senate. So, the Fed people are ultimately answerable to the government.

Now, supposedly, the Fed is “independent.” That means the Fed is supposedly insulated from political pressure and makes its decisions solely based on economic and monetary considerations.

But of course, it doesn’t work that way in real life.

Consider Arthur Burns.

He was the Federal Reserve chairman appointed by President Richard Nixon. He was supposed to be one of the “good guys.” Burns was an advocate for free markets, sound money, and the gold standard. But over time, Nixon badgered and bullied him into artificially lowering interest rates and signing off on economic “reforms” that included severing the dollar from its last connection to the gold standard. Burns cared more about maintaining his reputation and popularity among the ruling elite than his principles.

That pretty much tells you all you need to know about Fed “independence.”

Money Creator

The Fed’s real power come from it ability to “print” money.

When we say the central bank “prints money,” we don’t mean it literally runs off dollar bills in the basement of the Eccles Building. Modern money creation is digital. The Fed can simply write a check, even if funds don’t exist in the account, and “poof,” new money appears in the account of whoever receives the check. The Federal Reserve can’t bounce a check. This enables the central bank to expand the money supply at its discretion.

According to the powers-that-be, this is a feature, not a bug. The Fed’s ability to inflate the money supply supposedly creates economic stability.

You can learn more about Fed money creation HERE.