How the Federal Reserve System Functions - Term Paper Example

the Fed”) is so deeply interconnected with the entire political system, the inevitably byproducts of central banks are business cycles caused by politically-oriented monetary policies. Politicians use the Fed as a means of imposing fiscal policies that, although look good to constituents, ultimately worsen and damage the economy further (Bresiger, 2001). The following is an account of how the Fed is supposed to work, and the effects that the central banking system is supposed to have. An account of how it actually works is an entirely different matter.

The Federal Reserve is, in fact, a tool under public control, overseen and manipulated by government to accomplish the goal of a healthy, vibrant economy. As said before, the question of function is deeply rooted in the question of structure, which is in turn related causally to the history of the Fed. The Fed began with “panics” in the early 20th century, wherein people raced to banks to withdraw deposits. A fragile banking system at that time was overwhelmed, forcing Congress to draft the Federal Reserve Act, which, has been modified through time to encompass broader and wider responsibilities.

The Fed was forced to find the virtuous mean between the moral responsibility of the government and the private interests of banks, which gave rise to countless checks and balances imposed on the system by government influences (Meltzer, 2004). Congress, of course, ever since the first establishment of the Fed, has regulated the system. Based on that, the Fed is answerable to Congress and must work within the Congressional system. However, the Fed still retains a certain level of self-rule in order to carry out its responsibilities apart from the political process (Lapidos, 2008).

The Fed is composed primarily of three parts: the Board of Governors, the regional Reserve banks, and the Federal Open Market Committee. The first, the Board of Governors, is the agency of the Federal government regulating banks,