Federal Reserve System Case Study

The Federal Reserve System was created on December 23, 1913, with the Federal Reserve Act signed into law by President Woodrow Wilson. The Fed as it is called was a necessary solution to the lack of a central bank in the U.S. Without a central bank to regulate banking and the economy since 1836 there were a series of financial panics that damaged the banking system, the major event that brought about a sincere need for change was a financial panic in 1907, “The Panic of 1907 was a six-week stretch of runs on banks in New York City and other American cities in October and early November of 1907. It was triggered by a failed speculation that caused the bankruptcy of two brokerage firms.”1 A series of poor decisions made concerning stocks, lead …show more content…
The Fed uses open market operations, reserve requirements, and discount rates to gain control of the economy. The Fed uses tools such as reserve requirements to not only keep track of the real level of reserves and provide bank reserves with more security and convenience, but they use it to alter the ability to create loans within the banking system. Raising or lowering reserve requirements alters a bank’s ability to loan money thereby altering its ability to expand or contract the money supply. The Fed used open market operations (the most vital tool) to alter the money supply by buying or selling bonds when they want to make changes. The discount rate; the interest rate the Fed charges private banks to borrow money from the Federal Reserve, and federal funds rate; the rate of interest banks charge each other to borrow their reserves, are adjusted up or down to expand or contract the money supply. When the Fed decides that the economy is not performing at its full potential this is when they decide to use their tools to alter the money supply. When there is too much money in the money supply the Fed want to slow it down they will raise the reserve requirements, sell bonds, and increase the discount rate, these actions send a signal to banks that it is not the right climate to borrow excess reserves from the Fed, nor will they have enough excess reserves to loan money or invest in various portfolio decisions. When the Fed wants to grow the money supply they decrease reserve requirements, buy bonds, and decrease the discount rate, banks take this as an incentive to borrow excess reserves from the Fed, and the decrease in reserve requirements gives them the capacity to make a greater amount of loans and increase the money