Federal Reserve System Assignment 2022

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Running Head: FEDERAL RESERVE SYSTEM
Federal Reserve System
Student Name
Institutional Affiliation

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FEDERAL RESERVE SYSTEM
Table of Contents
The Federal Reserve System......................................................................................................4
Introduction................................................................................................................................4
History of the Federal Reserve System and Money and Banking in Stone Age America...4
Money and Banking Post Colonization..........................................................5
Functions of the Federal Reserve System..................................................................................6
Managing Inflation................................................................................6
Provision of Banking Services...................................................................7
Maintaining the Financial System Stability.....................................................7
Supervising the Banking System.................................................................8
Evolution of the Federal Reserve System..................................................................................8
Liquidity Tools....................................................................................8
Monetary Policy and the Zero Bound..........................................................10
Conclusion...............................................................................................................................10
References................................................................................................................................11

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FEDERAL RESERVE SYSTEM
The Federal Reserve System
Introduction
America's Central Bank is referred to as the Federal Reserve System or "The Fed."
The Federal Reserve System is one of the major factors in the US economy and the world
economy. The leading duty of the Fed Bank is to control money supply in the marketplace
through policy implementation and to supervise the activities of the commercial banks
(White, 2018). Basically, this this research paper attempts to analyze critically the history and
the functions of the Fed Reserve System, the events leading to its development, and how it
adapts and evolves.
The congress established the Federal Reserve System nearly a century ago as the
Central Bank in the USA. The then president signed the act into law in 1913. The creation of
the fed was prompted by the frequent occurrences of bank failures and lack of credit
(Andolfatto, 2018). The Fed history signifies the effort to enhance a secure and more steady
system of finance.
History of the Fed Reserve System and Money and Banking in Stone Age America
The Fed Reserve System was established in 1907 by President Woodrow Wilson
following the panics caused by businesses going bankrupt and ongoing bank failures. The
conventional means of exchange during colonial times was commodity money, barter trade,
and the European coinage. This primary means of exchange faced a lot of challenges due to
the inefficiencies of barter and commodity money and shortages of the European coins
(White, 2018). The colonialists introduced paper currencies and minting of coins. The British
rulers barred the issue of the new currencies due to the masses' lack of faith in it.
The significant difference between the modern banks and the colonial banks is that
the colonial banks did not accept any deposits from the general public nor offer loans but
instead they gave out paper currencies with land and other valuable metals like gold used as

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FEDERAL RESERVE SYSTEM
guarantees (Andolfatto, 2018). The sources of credit were from merchants and other able
individuals primarily.
Money and Banking Post Colonization
After independence, the government was kin to resolve the countries credit challenges
caused by the war. The constitution was ratified to create and develop a policy for a state
banking system. The idea was geared towards establishing a national currency and provision
of credit to the government and businesses (Moe, 2018). Commercial and financial entities
supported the system. The federal bank would provide a safe avenue for storing government
funds and act as the fiscal agent of the government.
The first bank was not without limitations; it, therefore, failed within a short period,
leading to a limited structured credit plan and a lack of a centralized banking system (Gelpern
& Véron, 2018). The failures of the first and the second banks created the emergence of the
free banking era. During the free banking era period, there was a rise of state-chartered banks
not limited to any federal regulations. Over time state banks started issuing its paper notes.
The effects of the decentralized banking system became more acute with the
expansion of the industrial economy. The massive demand for cash could not be met by
banks since they did not keep enough money on hand. Customers kept losing confidence in
the banks due to failures of other banks leading to huge cash withdrawal, which eventually
led to bank failures (Moe, 2018). The episode of failing financial institutions impelled
congress to create a Fed Reserve System in 1913 after a series of reform movements.
Government legislation has significantly shaped the operations and structure of the
central bank from the inception of the Federal Reserve. The Federal open market committee
was established after the great depression as a policymaker (West, 2019). The period of
surging inflation led to other subsequent reforms. The national policy ensured price stability