The Federal Reserve System was established in 1913, to create a more stable monetary system. Its purpose was to give the United States a monetary policy that would be more efficient, flexible, and safe.
The Fed has evolved over the years as banking and economics have changed. It now focuses on monitoring payments, credit risk, and time lag risk. These changes are beneficial for banks, as they increase their ability to borrow. Nevertheless, the Fed must remain independent from the executive branch. Hence, the governors and the Board of Governors play an important role in determining the nation’s monetary policy.
In addition to regulating national banks, the Fed also regulates some state banks. Some of the major duties of the Fed are to monitor and control financial institutions, promote a safe monetary system, and advocate community development.
Before the creation of the Fed, the government was able to borrow money by issuing bonds to finance war. However, after World War II, it became necessary to create an emergency reserve. Banks needed to have extra reserves to prevent a run on their accounts. This requirement was set by the Board of Governors, which fixed the minimum reserve requirement at seven, ten, and thirteen percent.
Following World War I, the system’s operations were expanded. The Board of Governors hired Benjamin Strong as the comptroller of the currency. He continued to dominate Fed policies through 1951, when the Democrats won back control of the White House.
During this period, the Fed maintained very low interest rates, and purchased securities on the open market. This policy led to large amounts of inflationary new money entering the economy. Congress passed a 1935 act that granted the Fed policymaking authority, which was later added to the Board of Governors.
Today, the Federal Open Market Committee (FOMC) determines the nation’s monetary policy. Members of the FOMC are governors, appointed by the president of the United States, who serve staggered terms of 14 years. They are confirmed by the Senate.
Currently, the Board of Governors consists of seven members, who are nominated and appointed by the president of the United States. Six of the board’s members are confirmed by the Senate.
Aside from the Board of Governors, there are twelve regional Reserve Banks in the United States. Each of these banks has a president, who serves as a director of the bank.
The Board of Governors is responsible for leading the Federal Reserve System and overseeing the performance of the Reserve Banks. Additionally, the Board of Governors reviews the budgets of all the Reserve Banks.
Although the Board of Governors is the central body of the Federal Reserve System, it is accountable to Congress. The Board of Governors is a federal agency located in Washington DC.
The Board of Governors has five primary functions. The first is to determine the requirements of member banks to hold reserve balances. Currently, the minimum requirement is 10-20 percent of the bank’s total assets. Occasionally, the board may change this requirement.