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Structure of central banks and the federal reserve system - Essay Example

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Discussing the origins of Federal Reserve System is significant because out of all the central banks, the structure of Federal Reserve System is unusual and different. The origin of Federal Reserve System dates back to 1913 when it was created. The American politics is known for…
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Structure of central banks and the federal reserve system
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Structure of central banks and the federal reserve system

Download file to see previous pages... e American public to the existence of central bank resulted in the failure of two banks in 1811 (First Bank of United States) and 1836 (Second Bank of United States) (Mishkin & Eakins).
Since the aim of establishing these two banks was to police the banking function, therefore, their failure caused problems for American financial markets because of the unavailability of lender of last resort. As a result bank panics were seen frequently during the nineteenth and early twentieth centuries. Finally, the panic of 1907 and the loss to depositors convinced the public regarding the importance of central bank system in an economy.
Even after being convinced, the fear of the American public opposed the establishment of a centralized authority or central bank (Bank of England). Moreover, the fears were also seen about the interference of government in the affairs of private banks. The major disagreement was that whether central bank should be a private bank or a government body. Finally the disagreement ended with the Federal Reserve Act of 1913 with its 12 regional Federal Reserve banks. Congress wrote the detailed system of checks and balances into this Act.
To diffuse power along the regional lines, between government and private sector, business community and public, the formal structure of Federal Reserve System was defined. Following are the four entities of Federal Reserve System.
In addition, more than 3000 commercial banks are the members of Federal Reserve System. Mishkin and Eakins (2007) systematically highlight the relationship between these entities and three policy tools of Fed.
The current European Central Bank was founded as a result of a treaty between European Central Bank and European System of Central Banks in 1999. Based in Frankfurt, Germany, European Central Bank consists of Executive board including president, vice president and four members and Policy group including executive group and governors of central banks from 11 member countries.
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