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Money and Banking. The Federal Reserve System

The Federal Reserve System has many functions and it occupies a central position in the monitory and banking system. Their aim is to control the monetary and banking system as well as control activities in order to have economic stability. Among their functions is to acts as a render of the last resort to the money market through its willingness to lend freely at bank rate on the security of first-class bills of exchange and management of the government monetary policy.

The stability of the economy is usually dependent upon the strength of the currency. An elastic currency will be able to respond appropriately to the changes in the economy. A sufficient amount of money must be retained in circulation in order for economic growth to foster. However, prior to the establishment of the Federal Reserve System, reserve accounts were being kept by small-town banks in large city banks. The large city banks also kept reserves in New York City banks.

If many customers withdraw their deposited money from these banks, most likely the many banks would fail to allow it thus customers would be leaving their money intact as deposits. In order to relieve this problem, the Federal Reserve System helps banks by lending them when they need it and supplying them when they are insufficient. Its main function is to oversee the money supply, supervise banks, act as the last lender resort, it also carries out various banking laws. It protects consumers by requiring lending disclosures to approving bank acquisitions, mergers, and ventures (Hill, 1999 P.50).

Federal Reserve System has three major policy functions. These are:

  1. to regulate the availability cost and use of money. This is to ensure that it can contribute to maximum economic stability,
  2. it prevents unhealthy bank practices by supervising its member banks, and
  3. to engage in direct lending business (Bach, 1950, P.5).

In order to further domestic and international objectives, a comprehensive reform of the payment system which includes the unified national check collection system was done by means of the Federal Reserve Act. The Federal Reserve has active involvement in processing checks and other forms of retail payments. This is to help the banking industry accelerate the check collection process. This can be facilitated because Federal Reserve uses high-speed sorting equipment and machine-readable routing and account numbers.

Elliott McEntee affirmed that Federal Reserve indeed played a very important role in payment systems and it has encouraged improvement in payment systems. According to McEntee, the Federal Reserve thinks of offering electronic payment methods which would help in the reduction of check volumes (Browne, 2001 P.3).

Overhauling the stunted discount market is the major provision of this act. This could be beneficial in the sense that it will add liquidity to the internal payment systems as well as facilitate the development of the U.S. dollar as the international currency. Furthermore, legalizing bankers’ acceptances and foreign branching can manifest the intention to allow international trade financing of the large American banks. Multiple outputs can be generated by this legislation.

For example, it allows the newly created Reserve Banks to influence internal credit markets, exchange rates, and gold flows (Broz, 1997 P. 8). The role of the Federal Reserve has been expanded by Congress. In 1946, the Congress mandated Federal Reserve to promote maximum employment by using all its resources. In 1978, Congress expanded the role of the Federal Reserve with the Full Employment and Balanced Growth Act (Hill, 1999 P.50).

In recent times the federal system has involved itself in bailing out banks which going down. The effect of the collapsing banks has been felt in the New York stock exchange, where the performance of the financial market was very low. To salvage this federal system came in to inject new money into the collapsing banks.

Following functions, the recent activities are consistent with the objectives of ensuring stability in economic activity. therefore the action is justified as long as they keep the economy in check and ensure.

The Federal Reserve System has been assisting the federal government in ensuring a stable economy. It also helps in creating more jobs for the Americans hence employment problems are slowly resolved. It is very important that currency would remain stable as much as possible since it is a determining factor in the stability of the nation’s economy. Therefore, the Federal Reserve plays a vital role as it performs responsibilities that are economically essential and their actions are not only consistent but also justified.

Work Cited

Bach, G. L. (1950). Federal Reserve Policy-Making: A Study in Government Economic Policy Formation. New York, Knopf.

Browne, Lynn Elaine (2001). The Evolution of Monetary Policy and the Federal Reserve System over the Past Thirty Years: An Overview. New England Economic Review, p. 3.

Broz, J. Lawrence (1997). The International Origins of the Federal Reserve System. Ithaca, NY., Cornell University Press.

Goodfriend, Marvin (1994). Why We Need an ‘Accord’ for Federal Reserve Credit Policy. Journal of Money, Credit & Banking, vol. 26, is. 3, p. 572.

Hill, Patrice (1999). What the Fed Does and Doesn’t Do. World and I, vol. 14, is. 4, p. 50.

Shull, Bernard (2005). The Fourth Branch: The Federal Reserve’s Unlikely Rise to Power and Influence. Westport, Connecticut, Praeger.

(2006). Money Panics and the Establishment of the Federal Reserve System. Social Education, Vol. 70, Is. 2, p. 69.

The Federal Reserve system purposes and functions. Web.