The Federal Reserve Bank was created by an act of the U.S. Congress in 1913, but the executive and legislative branches do not control it directly. Instead, it has its own independent board and is headed by a chairman. Congress does have the power to oversee the Fed, and there have been many legislative pushes to audit the Fed. The U.S. Treasury also exerts indirect control on the Fed through its operations. The actual owners of the Fed are private member banks, which purchase shares and are paid dividends for their ownership.

Board of Governors

There are 12 regional Federal Reserve Banks in the United States. Each of these branches has its own governor, who sits on the Board of Governors of the Federal Reserve. In fact, each of the 12 Fed banks is separately organized into a corporation. Private commercial bank shareholders elect six of the nine board members for regional Fed banks.

Chairman of the Federal Reserve

One very direct way that the U.S. government influences the Fed is through the Chairman of the Fed. Each Fed Chair is chosen by the president of the U.S. and approved by Senate vote.

Origins of the Federal Reserve

The Fed was actually modelled after the old New York Clearinghouse of the 19th and early 20th centuries. The New York Clearinghouse was designed to allow major financial institutions to settle interbank payments. In reality, the Fed spends most of its time smoothing out payment processes on a national scale.

There were two primary goals of the Federal Reserve following its creation: to serve as a lender of last resort and to keep the value of the currency. While it has roundly failed to keep the value of the U.S. dollar, it has bailed out several major companies over its 100+ year existence.

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  3. What do banks do to control the bank reserve?

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  4. Why would the Federal Reserve change the reserve ratio?

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  5. What role did the Great Depression play in developing America's bank reserve policies?

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