Federal Reserve System Paper - Founded by Congress in 1913

Federal Reserve Paper

Founded by Congress in 1913 to provide America with a safer, flexible, and stable monetary system, the Federal Reserve System's role is to conduct monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system, and provide financial services (Board of Governors of the Federal Reserve System, 2009). From the economic decline in 2007, the Federal Reserve Board has enacted economic policies getting the nation back on track. This essay will explore using the website, to define the purpose and function of money, explain how the central bank manages the nation's monetary system, outline the stated direction of recent monetary policy, list one policy action in place to confirm that direction, and explain the effects of monetary policies on the economies' production and employment.

The purpose and function of money is to provide a common scale for valuing goods and services and is an official currency issued by a government. Before the invention of money, parties bartered for goods, although disagreements over perishable items like milk, in exchange for lumber created unequal values. Unlike certain goods, money does not age, die, grow stale, or expire. Money also provides a means to perform a transaction if only one party member wants what the other is offering for sale. Money can be saved, or borrowed for large purchases such as homes, and cars, or to serve the needs and wants of a population.

The Federal Reserve manages the nation's monetary system by performing three tasks. The Federal Reserve has the capacity to change the percentage that banks (reserve requirements) must retain in their vaults of every dollar deposited. If the Federal Reserve demands that 10% of every dollar is retained, then the other 90% can be used to issue out loans for business ventures, so more money is loaned out. If the Fed raises, their requirement, less money is available for loans. The Federal Reserve can change the interest (discount) rates on money loaned to banks. If interest rates are high, borrowing money costs more, discouraging both lenders and borrowers. Third, open market operations are the Federal Reserve's principle tool for implementing monetary policy by controlling the short-term interest rate and supply of money in the economy. This is accomplished by buying and selling government securities and other financial instruments such as gold. The open market operation can also control inflation by selling treasury bills to commercial banks, blocking money loaned out to the public.

The recent monetary policy of the United States Federal Reserve is to keep target range for federal funds rate at zero to ¼ percent. In an announcement on June 22, 2011, the committee forecasted that there would still be slow growth and to promote the recovery by keeping inflation at levels consistent with its mandate. The committee