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In 1913, the Federal Reserve system, the main banking system of the whole United States, was established. Back then, the United States citizens had no idea that the association would turn out to what it has. The Federal Reserve conducts open market operations to control the nations money supply. They fulfill these requirements on account of two specific groups. One is a federal government agency and is known as the Board of Governors, and the second is a constellation of twelve regional reserve banks.
Today’s well known Federal Reserve System happens to be the third central banking system in the history of the United States. The first banking system of the United States was established in 1791 and lasted until 1811 and the second bank was established in 1816 and lasted until about 1836 (“Federal Reserve System”). They “both issued currency, made commercial loans, accepted deposits, purchased securities, had multiple branches, and acted as fiscal agents for the U.S. Treasury” (“System”). In addition, both banks consisted of the majority control in the hands of private investors. However, as great as they seemed at the time, both banks had two major flaws: “inelastic currency and a lack of liquidity” (“System”).
National bank currency was considered inelastic because it was based on the fluctuating value of U.S. Treasury bonds rather than the growing needs of the U.S. economy. If Treasury bond prices declined, a national bank had to reduce the amount of currency it had in circulation by either refusing to make new loans or by calling in loans it had already made. The related liquidity problem was largely caused by an immobile, pyramid reserve system, in which nationally chartered country banks were required to set aside their reserves in reserve city banks, which in turn were required to set aside reserves in central city banks. (“Federal”)
It was official in 1913, when Congress passed an act known as the Federal Reserve Act which...