The Federal Reserve System

There are seven functions of the Federal Reserve System. The first function is to address the problem of banking panics. Banks, like all financial systems, are ran by people and as often is the case, when times of financial crisis people tend to panic. When does occur, what typically will happen is a bank run. Bank runs happen because banks don’t keep enough cash on hand at any one time to give every person who banks with them their money back. A classic example of a bank run was illustrated in the movie It’s a Wonderful Life .

The people in the town fearing that they would lose everything panic and all run to the bank to get their money out. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and to respond appropriately when they do happen. The second function of the Federal Reserve Ssystem is to serve as the central bank for the United States. In the role of the central bank for the United States, the Federal Reserve wears in effect two different hats, the banker’s bank hat and the government’s bank hat.

In it’s role as the banker’s bank, the Federal Reserve helps to assure the safety and the efficiency of the payment system. In the role of the government’s bank, the Federal Reserve processes a variety of financial transactions that involve trillions of dollars. The third function of the Federal Reserve System is to strike a balance between private interests of banks and the centralized responsibility of government. The Federal Reserve preserves this balance in two ways.

The first way that the balance is perserved is that the Federal reserve acts as an agent to supervise and regulate banking institutions. Each private bank elects the members of the board for their regional Federal Reserve Bank while the governing board of the Federal Reserve itself is appointed by the president and approved by the senate. The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions.

The second way the blance between the private sector and the government is achieved in the Federal Reserve System is in the way that the credit rights of consumers are protected. The Federal Reserve does this by carefully monitoring the private banks and making sure that they don’t over step their bounds where the rights of consumers are concerened. The fourth function of the Federal Reserve System is to manage the nation's money supply through monetary policy to achieve the sometimes conflicting goals of maximum employment, stable prices, and moderate long-term interest rates.

Basically the Federal Reserve ensures that the money supply is kept flowing in our nation by ensuring that our economy remains stable and that there is a stability in prices while at the same time monitoring that long-term interests are kept at a moderat level. The fifth function of the Federal Reserve System is to maintain the stability of the financial system and contain systemic risk in financial markets.

The Federal Reserve does this by monitoring the different components of the system and by implementing monetary policy whenever there seems to be a financial risk at one of the banks. The sixth function of the Federal Reserve System is to provide financial services to depository institutions, the U. S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system by facilitating the exchange of payments among regions and to respond to local liquidity needs.

Basically, the Federal Reserve acts in this fashion as a liason among it’s different parts to ensure that the whole system is running smoothly. The seventh function of the Federal Reserve System is to strengthen U. S. standing in the world economy. The Federal Reserve is partly an agent of the United States government and as such part of it’s mission is to help stregthen the United States in foreign markets by using the Federal Reserves Open Market Committees to help facilititate this exchange (Miller, 1997).