Most of the central banks in many countries have almost similar structure. However, the Federal Reserve System in the USA has a totally different structure. Federal Reserve System was created in 1913. The reasons as to why it has 12 Regional Federal Reserve Banks can be traced to the American political history .
Before the Federal Reserve System, there was fear in America, in the political arena, of centralized power. The Americans had a great resistance towards setting up of a central bank. They also had a high doubt on the moneyed interests upon which central banks were formed. This distrust had led to the collapse of the first two central banks they had attempted to establish. After the second central bank expired in 1836, there was a great problem in the banking sector, in America. This was as a result of there being no lender of the last resort, a function carried out by all central banks. There were experienced shocks and panics in the monetary system of America, in the 19th and early 20th centuries. The losses experienced in 1907 convinced the public of the need to have a central bank to prevent such panics and shocks.
Hostility of the Americans towards banks and centralized authority brought about a big opposition towards starting a central bank as a single unit. There was fear that such a centralized institution could be easily manipulated by the bigger banks, large corporations as well as too much government intervention. Due to these fears, the Congress developed a system that ensured checks and balances through the Federal Reserve Act of 1913, thereby creating Federal Reserve System which had 12 regional Federal Reserve banks .
The Federal Reserve System was established as autonomous from the federal government. It is an independent quasi-governmental body. This was made so by the Act of 1913 to avoid too much interference of the federal government with the private banks. It is run by a constitution just like the federal government making it independent from the state. This also helps shield the system from political interference.
Occasionally, the Fed alters the discount rate. It could either reduce or increase the discount rates. The Fed has the sole authority of altering the discount rates. What does it mean to reduce the discount? This is aimed at bringing back confidence in the financial markets. By the reducing interest rates, the fed ensures easy borrowing of funds by banks. These funds are needed to maintain the banks’ reserve requirements. This shows that the Fed is expanding its monetary policy to include even the smaller banks . This is meant to shield these banks that are not able to access the increased lending rates between banks. An expanded monetary policy helps to calm financial markets.
The reduction in discount rates or interest rates enables the Federal Reserve to have control of the money supply which ensures stability in financial markets. Thus reducing interest rates will expand the lending power of the banks in USA that will in turn increase the supply of money in the economy . This leads to an expanded monetary policy as the people of USA will have more to spend on assets or to save in banks. Thus, as the sole controller of the monetary policy in the USA, the fed is expanding the monetary policy through lowering interest or discount rates.
Works Cited
Amadeo, Kimberly. "Money Supply in the US Economy." The Wall Street Journal (2013): 48-52.
Appelbaum, Binyamin. "Fed Misread Crisis in 2008, Records Show." New York Times (2014): 88-95.
Wicker, Elmus. The Great Debate on Banking Reform. Ohio: Ohio University Press, 2005.
