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Federal Reserve Banks

Financial Dictionary -> Banking -> Federal Reserve Banks

Federal Reserve Banks are financial institutions that are part of the Federal Reserve System in the United States, which operates a central banking system. It is based on the Federal Reserve Act of 1913 and is set up as a part governmental entity and part private entity, with a board of directors located in Washington DC. Located in the major cities there are twelve Federal Reserve banks, each with their own board of directors. This system is responsible for all of the money in the United States.

The Federal Reserve Act was passed after several financial crises and bankruptcies, sparking the government to properly control the monetary and banking system so the United States economy remains stable.

Their main purpose and goals are to control the country's monetary system by manipulating credit, money and the economy accordingly. To oversee and regulate the country's banks, ensuring safety and efficiency. To maintain general stability in the financial system and to provide services and finance to the United States Government, national financial institutions, the public and to monitor the US's payment system.

In the reserve banking system the money supply is created upon the government's request based on several factors. If the country needs an influx of $5 million for example, the Federal Reserve will buy $5 million in government treasury bonds and then give the government the $5 million in dollars. This then goes in to the banking system and becomes legal tender. This has often fallen under great criticism, because in essence the government is now $5 million in debt to the Reserve. It gets even more questionable when the $5 million added to the economy is not actually a physical $5 million in notes, but more a computerized transaction, meaning the debt is actually offset in society. Some theorists claim that because of this there is no way out of debt and somewhere along the line the little guy will always lose out, as money is created out of debt and the debt just keeps growing as more money is needed.