___________ University
When the United States was finished fighting the Revolutionary War, many Americans were left very deep in debt. Furthermore, there was an economic crisis that was widespread. The government needed a way to keep the United States economy from collapsing. There were several attempts at nationalizing the American banking system which was unsuccessful. However, on 23 of December 1913, former President Woodrow Wilson signed into law the Federal Reserve Act. The passing of the Federal Reserve Act created what is known today as the Federal Reserve. According to its website, the Federal Reserve “was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system” (Board of Governors of the Federal Reserve System, 2014). The Federal Reserve help the American economy in several ways.
The Federal Reserve help the American economy by using manipulation to foster economic growth. The Federal Reserve, seeking to ensure prices are stable and that employment is full, will influence the conditions of money and credit by passing monetary policies. Additionally, the Federal Reserve protects the consumers’ credit rights and ensures that the nation’s banking and financial institutions are both safe and sound. They do this by “supervising and regulating banks and other important financial institutions” (Board of Governors of the Federal Reserve System, 2014). Over the years, the Federal Reserve has instituted several policies.
The Federal oversees the monetary policy. Three primary tools of the monetary policy are the open market operations, discount rate, and reserve requirements. Open market operations are the purchasing and selling of the securities of the federal agency and the United States Treasury. The discount rate is the interest rate which the depository institutions and commercial banks are charged on loans that their regional Federal Bank’s lending facility sends to them. Additionally, since there is a possibility of liabilities, depository institutions reserve requirements that are held to cover any future liabilities. I believe some of these policies are successful while others are unsuccessful.
Similar to many other institutions, the Federal Reserve have both success and failures when it comes to its policies. Part of the Federal Reserve goal is full employment. According to Thomas Palley, the Federal Reserve “has not been doing so for the past 35 years, preferring to emphasize price stability (i.e., inflation) on grounds that full employment will take care of itself if inflation is low and stable” (Palley, 2015). Furthermore, the Federal Reserve discount rate is a major controversy because there is a set amount of time known as a discount window that allows a bank to receive a loan from their regional Federal Bank. The reason for the controversy is that the Federal Reserve lending continued “through the discount window rather than only on a temporary basis” (Michel, Ph.D., 2014). However, the Federal Reserve had some success with the open operation aspect of the monetary policy. According to Norbert J. Michel, Ph.D., “after the 1987 stock market crash, prior to the Y2K computer scare, and in the wake of the 9/11 terrorist attacks, the Fed temporarily expanded its normal open-market Treasury purchases” (Michel, Ph.D., 2014). While the United States struggled to keep the economy from failing, the creation of the Federal Reserve was a much-needed relief.
The Federal Reserve has helped the American economy in many ways in the past. However, there have been some issues in recent times that needs to be addressed such as putting inflation over the full employment of Americans. The Federal Reserve passed policies such as the monetary policy which helps to regulate certain aspects of the department. These policies have been both successful in some ways and unsuccessful in other respects.
References
Board of Governors of the Federal Reserve System. (2014, February 4). FRB: What is the purpose of the Federal Reserve System? Retrieved from http://www.federalreserve.gov/faqs/about_12594.htm
Michel, Ph.D., N. J. (2014, August 20). The Fed's failure as a lender of last resort. Retrieved from http://www.heritage.org/research/reports/2014/08/the-feds-failure-as-a-lender-of-last-resort-what-to-do-about-it
Palley, T. (2015, February 9). The Federal Reserve and shared prosperity: Why working families need a Fed that works for them | Economic Policy Institute. Retrieved from http://www.epi.org/publication/federal-reserve-and-shared-prosperity/
