Value Investing – The Federal Reserve System (Lesson 20)

No other federal government creation is more misunderstood than the Federal Reserve System. The Federal Reserve’s primary purpose is to act as the central banking system for the United States. Formed in 1913, the Federal Reserve was tasked by Congress with three primary functions. One – maximize employment in the United States. Two – stabilize prices (control the inflation rate) and three – influence the interest rates for long-term notes. Since 1913 the Federal Reserve has expanded its role to include setting the monetary policy and regulating the entire US banking system. 

To explain how the Federal Reserve System (the Fed) works, first, some history of how banking in the United States existed and why the Fed was initially created by Congress. Next, this article will cover the Federal Reserve Act and the expansion of duties and powers of the Fed over the past 100 years. The final section will cover how the Fed is able to control our economy via the monetary policy and regulating the banking industry.

Banking History

To understand the banking history in the United States, you must understand about the great battle over centralized banking. Before explaining the history of banking, you need to understand the classic issue of centralized banking.

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