Why A Federal Reserve System?
Before we dig into the Fed's structure and how it works, let's start with some background on the Federal Reserve—how and why we were created in the first place.
Just before the founding of the Federal Reserve, the nation was plagued with financial crises. At times, these crises led to "panics," in which people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy.
Establishing the nation's first central bank was no simple task. Although the need for banking reform was undisputed, for decades early supporters debated the delicate balance between national and regional interests. On a national front, the central bank had to be structured to facilitate the exchange of payments among regions and to strengthen the U.S. standing in the world economy. On a regional front, the central bank had to be responsive to local liquidity needs, which could vary across regions.
Another critical balancing act was that between the private interests of banks and the centralized responsibility of government. What emerged with the Federal Reserve System was a central bank under public control, with countless checks and balances.
As our previous diagram illustrates, Congress oversees the entire Federal Reserve System. And the Fed must work within the objectives established by Congress. Yet, Congress gave the Federal Reserve the autonomy to carry out its responsibilities insulated from political pressure. Each of the Fed's three parts—the Board of Governors, the regional Reserve banks and the Federal Open Market Committee—operates independently of the federal government to carry out the Fed's core responsibilities.
Now let's break down the structure and responsibilities to see who we are and then what we do.
