The Nation's Central Bank

The Federal Reserve System Is the Central Bank of the United States

What is a central bank, and why do we need one? The Federal Reserve, often called the Fed:

• manages our nation's supply of money and credit and operates at the center of the nation's financial system;
• keeps the wheels of business rolling with currency, coin, and payments services, such as electronic funds transfer and check-clearing;
• serves as the banker for the federal government by providing financial services for the U.S. Department of the Treasury;
• supervises and regulates a large share of the nation's banking and financial system; and
• administers banking and finance-related consumer protection laws.

Why We Need a Central Bank

The United States lacked a central bank until the twentieth century, although there were two attempts to establish a central bank in the early 1800s. Without a money manager, the nation's financial system was like the nation itself--diverse and subject to uneven growth. As a result, there were frequent economic depressions and financial panics, and the Bank Panic of 1907 finally convinced the public that a central bank was necessary. Reform was difficult. In the more established eastern cities, business leaders wanted to create a national financial system. In the West and South, small businesses and farmers feared a national financial system would not provide enough easy credit to support their developing economies. In 1913, after considerable debate, Congress passed the Federal Reserve Act to balance the financial needs of the country.

The Fed Is First and Foremost the Nation's Money Manager

The nation needs a money manager because money does not manage itself. Money and credit are the lifeblood of the economy; they facilitate commerce, job creation, and business growth. As our nation's money manager, the Fed implements monetary policy to manage the flow of money and credit in the economy. If money and credit expand too rapidly, businesses cannot produce enough goods and services to keep up with increased spending. Prices may rise, causing inflation. If the flow of money and credit contracts too greatly, spending and business activity may dwindle, workers may lose their jobs, and a recession may result. As our nation's money manager, the Fed conducts monetary policy to attempt to balance these two extremes to keep prices steady, workers employed, and factories productive.

Organization of the Fed