Need of Federal Reserve for the US - Justification - Essay Example

?Need of Federal Reserve for the US: Justification The Federal Reserve System is the central banking structure of US. The Federal Reserve was established in 1913 with the need of a central financial system in the economy of US. The central banking system was set up under a situation of continuous financial panics in the economy of US. The structure, roles and the responsibilities of the Federal Reserve has undergone rapid changes over the years which have been mainly stimulated by the events like the Great Depression, Global Financial Crisis, etc. The structure of the Federal Reserve System is composed of a governing board, the open market committee, regional Federal Reserve banks, privately owned banks in US and the advisory councils. The Board of Governors is appointed by the President who controls the functions of the Federal Reserve System. There are Federal Reserve Banks which operates in major cities of US. The major objectives of the Federal Reserve System are aimed at the welfare of the US economy. The Federal Reserve System in US is responsible for maximizing the employment opportunities in US, stabilizing the prices in US economy and achieving stability in long term interest rates (Wells 58). The monetary policy is designed by the Federal Reserve System of US. The other functions of the central banking system in US include regulation of the banking structure that includes the government and the private players as well as the advisory councils. The central bank also provides financial services to other depository agencies. The overall financial stability of the economy of US is the responsibility of the Federal Reserve System. Before the Federal Reserve System was set up in 1913, there were around 30000 currencies in the economy of US. Many business houses and even the drug dealers could issue currency notes for financial transactions. This created a situation of instability in the economy of US. The financial system was in turmoil and the banks and financial institutions faced lot of problems which created panic among the depositors and the investors. Due to the presence of a large number of currencies and currency notes being issues without proper regulations created liquidity crisis in the economy. The banks and the financial institutions faltered in paying their depositors and this created a situation of panic in the financial system of US. Apart from this, the various currencies in US had different denominations and values. The absence of a standardized currency created difference and problems among the traders. The business, imports and exports all suffered due to the presence of varying numbers of currencies and absences of standardized form of currency in the economy of US. The Federal Reserve System of the US was created to standardize the currency of the economy of US and thereby establish a position of stability in the economy (Grey 98). The Federal Reserve System provides a central banking system to the economy of US where the business and he individuals could deposit their money in the standard currency of US dollar. The depositors could also withdraw their money from the Federal Reserve System at the time of need. These withdrawals took place in the same standardized currency of US dollars. Thus the Federal Reserve System could drive away the intermediate currencies and their varying values and established a standardized form of currency to be followed by the customers and traders in order provide an organized monetary system and sufficiency in liquidity. The US economy invariably needs the Federal Reserve System in the economy without whose functions there would be ample distortions in the economy that would hamper the economic growth of US. This could be understood from the roles and responsibilities of the Federal Reserve System and the implication on the US financial and economic system in absence of its role. The Federal Reserve System plays the role of balancing between the centralized role of the government for the welfare of the economy and the private interests of the banks. The Federal government has the responsibility of maintaining stability in the financial structure of the US economy by establishing equilibrium between the supply and demand. The policies of the Federal Reserve System is aimed at establishing a balance between the profit earning motives of the private players and at the same time meeting the demand of the economy (Livingston 38). The functions of the Federal Reserve System are important as it supervises the functions of the private and foreign players in the economy and also regulates their course of action. The absence of Federal Reserve System would expose the financial system and the economy to the risk of having no regulations in the system. In absence of regulations, there would not be a standard framework of operation. The requirements of capital adequacy, liquidity, cash-reserve ratio, etc. would not be met. This would expose the depositors and the customers for not being able to withdraw their demand deposits. Thus Federal Reserve System protects the credit rights of the depositors in US. The most significant role played by the Federal Reserve System for which the US economy needs their central banking system is the function of designing appropriate monetary policy for the US economy. The monetary policy not only maintains the appropriate level of liquidity in the US economy but is also responsible for controlling inflation and the employment level in the country. The Federal Reserve System varies the short tern interest rates and ensures stability in prices in the economy thereby controlling the inflation rates. The stability of long term interest rates of the US economy also falls under the purview of Federal Reserve System. The monetary policies of the Federal Reserve System include variation of interest rates in order to vary the flow of liquidity in the economy. A rise in the interest rates by the Federal Reserve System means that the public and the depositors, both individual and commercial would tend to deposit more money into the banking system. This would squeeze the liquidity from the economy of US and provides more liquidity in the hands of the banks and the financial system. Due to the fall in the level of liquidity, the consumption demand of the economy would fall against the prevailing level of supply. This would tend to stabilize the prices and would, therefore, control inflation in US. On the other hand, in order to control deflation and protect the interests of the private investors, the Federal Reserve System decreases the interest rates by certain basis points in order to inject liquidity in the economy due to which the investment levels and the employment rises (Melicher and Norton 80). The monetary policies of the Federal Reserve System are subject to constant review as more liquidity in the economy would again lead to inflation. The economic crisis of 2007 highlighted the importance of Federal Reserve System for economic revival of US. The role of the Federal Reserve System has changed over the years. Apart from the monetary policies, the Federal Reserve fiscal policies are also important for stability of the US economy. In order to stage a revival along with keeping a control over the rising debt of $1 trillion, the Federal Reserve reduced the taxes of the individual and the corporate in order to provide more liquidity to the economy. The Federal Reserve System plays the key role of mitigating the systematic risk of the market. The Federal Reserve System ensures stable conditions in the economy of US which build market confidence and guide the US economy for long term growth. Works cited Melicher, Ronald. and Edgar, Norton. Introduction to Finance 14th Edition. USA: John Wiley & Sons, 2011. Print. Wells, Donald. The Federal Reserve System: A History. USA: McFarland, 2004. Print. Grey, George. Federal Reserve System: Background, Analyses and Bibliography. USA: Nova Publishers, 2002. Print. Livingston, James. Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913. USA: Cornell University Press, 1989. Print. Read More