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The History of the US Federal Reserve – Is it a private institution?

The US Federal Reserve also known as the Fed Reserve is the central banking system in the United States of America. The system was established in 1913 after the country, and the rest of the world, suffered a series of economic disasters. Its purpose was to monitor economic stability and ensure effective management of money in the economy to avoid any financial panics in the future. It involved governing the financial institutions as well as monetary policies.

Some of the other important functions that the body was supposed to carry out included monitoring and maintaining employment levels; governance of the prices of commodities, goods and services as well as regulating interest rates by using various monetary policies. Moreover the body was assigned the task of studying and analysing the American economy as well as the economies of surrounding areas.

The Need for the US Federal Reserve as the Central Bank

The need for a central bank in the American region was realised towards the end of the 18th century and since then the people in the region have been trying to get a monetary system in place to aid trade.

In 1791, the First Bank of United States came into existence as the central bank in the US. It was given a charter as the central bank for the next two decades. The tenure ended in 1811 with the House of Representatives voting against the re-charter of the bank. This led to a 5 year period with no central bank. In 1816, President Madison revived the central bank in the form of the Second Bank of the United States, which again lasted the 20 year charter period given to it. In 1937, the free banking era started in the United States. This went on for the next 25 years and in this period there was no central bank in the country. Finally, in 1863 there was a system of nationalised banks that was created via the National Banking Act. This system lasted for the next 50 years.

In the five decades when nationalised banks took over, there were three occasions when the country faced severe economic problems. This gave momentum to the rising call for a centralised system. Finally, in 1913, the Federal Reserve Act was passed, giving birth to the US Federal Reserve as the centralised banking establishment in the country.

The Forming Structure of the US Federal Reserve

The structure of the US Federal Reserve brings together a lot of entities and individuals. It comprises of a board of governors that is appointed by the President, the FOMC, a dozen of the Federal Reserve Banks that are located in the major cities across the country, a number of US banks that are owned privately as well as other advisory councils.

As it is obvious from the structure of the US Federal reserve, it is jointly formed with elements from the public and private sectors. The Fed Reserve is known to operate independently within the government structure; no one from the legislative council and not even the President has any say in the monetary policies released by the Fed Reserve. With such a formation and operational process, the Fed Reserve represent the people as well as the bankers.

The Controversy of the Fed Reserve being more Private than Public

With a huge presence of private institutions in the US Federal Reserve System, there has definitely been some controversy about the kind of influence that these private players have. A lot of people believe that the power and money that the private players possess can enable them to have monetary policies that work well for them but might end up working against public interests. This could possibly lead to the situation that is least ideal for an economy with the rich getting richer and the poor becoming poorer.

With the rich and powerful bankers also having massive presence in the legislative part of the government in the form of House representatives, the doubts are increasing by the day. It is very important to define the purpose of the Federal Reserve and also reassure the common bank that it is a system that is unbiased.

Striking the Right Balance

It is very important that the US Federal Reserve can strike the balance between being an institution that is highly influenced by private bankers and being the section of the government that is also responsible for the needs and prosperity of the common man.
With the Federal Banking Agency Audit Act of 1978, the GAO (Government Accountability Office), possesses the right to audit the Federal Reserve. Though there are certain things that fall into the category of items that cannot be audited, most of the Federal Reserve transactions and functions can be audited by GOA.

With this body and act in place, it gives more credibility to the actions of the Federal Reserve and also makes it more responsive towards the need of the people. It helps the central bank in the country strike the right kind of balance. While the private bankers, who help in the money management of a large section of the economy, have their say in the operations, even the common man is well represented.

So, is the Federal Reserve a Private Institution?

As mentioned above, since the inception of the concept of a central bank in the US, it has always been about the betterment of the economic conditions and facilitating pricing stability for the people. Though people have had reservations about the fact that the Fed Reserve is run by private bankers and represents the private institutions more than it represents the public, there have been constant efforts by the government to reinstate public confidence in the system by having various monitoring, auditing and governing policies for the Federal Reserve.