Economics and Business

Federal Reserve

What is the Federal Reserve?

It is the central banking system in the United States, created by a 1913 act of Congress, the Federal Reserve Act (sometimes called the Glass-Owens Bill). The legislation provided for a stable central banking system after the system set up by the National Bank Act of 1863 proved ineffective in managing the nation’s currency, in responding to economic growth, or in exerting a controlling influence on the economy.

The Federal Reserve Act created 12 regional federal reserve banks: in Boston, Massachusetts; New York; Philadelphia, Pennsylvania; Cleveland, Ohio; Richmond, Virginia; Atlanta, Georgia; Chicago; St. Louis, Missouri; Minneapolis, Minnesota; Kansas City, Missouri; Dallas, Texas; and San Francisco, California. These institutions operate as “bankers’ banks”: member banks (commercial institutions) use their accounts with the Federal Reserve in the same way that consumers use their accounts on deposit at commercial banks. All national banks must be members of the Federal Reserve system; state banks may join the system upon meeting certain requirements. The Federal Reserve Act also established a Federal Reserve Board, now called the Board of Governors, to supervise the system. The board consists of seven members who are appointed by the president of the United States and are approved by the Senate. To reduce the possibility of nearsighted political influence, members serve staggered 14-year terms (one of the 14 terms expires every other year).

The duties of the Federal Reserve include lending money to commercial (member) banks, directing the reserve banks’ purchase and sale of U.S. government securities on the open market, setting reserve requirements (for how much money needs to be in the U.S. Treasury), and regulating the discount rate (the interest rate the Federal Reserve charges commercial banks for loans), which is one of the system’s principal influences on the economy. In performing these duties, the Federal Reserve (often called “the Fed” in financial circles) can expand (loosen) or contract (tighten) the supply of money in circulation. The Federal Reserve also issues the national currency and supervises and regulates the activities of banks and their holding companies. It began operation in November 1914.

The central bank systems of other developed nations include the Bank of Canada, Banque de France, and the Deutsche Bundesbank (of Germany).


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