It exercises this control by influencing the demand for and supply of these balances through the following means:
Open market operations -- the purchase or sale of securities, primarily U.S. Treasury securities, in the open market to influence the level of balances that depository institutions hold at the Federal Reserve Banks (The Board's Publications Committee, 2005).
Reserve requirements -- requirements regarding the percentage of certain deposits that depository institutions must hold in reserve in the form of cash or in an account at a Federal Reserve Bank.
Contractual clearing balances -- an amount that a depository institu-tion agrees to hold at its Federal Reserve Bank in addition to any required reserve balance.
Discount window lending -- extensions of credit to depository in-stitutions made through the primary, secondary, or seasonal lending programs (The Board's Publications Committee, 2005).
The Fed's original and ongoing function has been to organize, standardize, and stabilize the monetary system in the United States. It set up a method that could create "liquidity" in the money supply -- in other words, make sure banks could honor withdrawals for customers. It also needed to come up with a way to create an "elastic currency," meaning it had to control inflation by making sure prices didn't climb too quickly, and it needed a way of increasing or decreasing the country's supply of currency in order to prevent inflation and recession (Obringer, 2002).
Why do we need the Federal Reserve System?
To answer this question it would be relevant to go back in time and remember why it was started in the first place. Before the Federal Reserve was created there were many different currencies in use throughout the U.S. Some of the currencies were backed by silver or gold, and others by government bonds. Some of the banks at times didn't even have enough money to cover withdrawals from their own customers.
Before the Federal Reserve was created, banks were failing, and the economy had extensive up and down swings. The confidence level Americans had in the banking system was weak. Imagine yourself in today's current economic situation, how uncomfortable you would feel with your money in the banking system without the FDIC insuring your funds. Knowing today that your account is insured and you...
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