Introduction to Finance

central bank
is a government-established organization responsible for supervising and 
regulating the banking system and for creating and regulating the money supply. While central 
bank activities may diff er somewhat from country to country, central banks typically play an 
important role in a country’s payments system. It is also common for a central bank to lend 
money to its member banks, hold its own reserves, and be responsible for creating money.
Even though the shortcomings of the national banking system in terms of the payments 
system, infl exible money supply, and illiquidity were known, opposition to a strong central 
banking system still existed in the United States during the late 1800s. The vast western fron-
tiers and the local independence of the southern areas during this period created distrust of 
centralized fi nancial control. This distrust deepened when many of the predatory practices of 
large corporate combinations were being made public by legislative commissions and invest-
igations around the turn of the century.
The United States was one of the last major industrial nations to adopt a permanent sys-
tem of central banking. However, many fi nancial and political leaders had long recognized the 
advantages of such a system. These supporters of central banking were given a big boost by 
the fi nancial panic of 1907. The central banking system adopted by the United States under the 
Federal Reserve Act of 1913 was, in fact, a compromise between the system of independently 
owned banks in this country and the single central bank systems of such countries as Canada, 
Great Britain, and Germany. This compromise took the form of a series of central banks, each 
representing a specifi c region of the United States. The assumption was that each central bank 
would be more responsive to the particular fi nancial problems of its region.
4.3
Structure of the Federal Reserve System
The Federal Reserve System is the central bank of the United States and is responsible for 
setting monetary policy and regulating the banking system. It is important to understand that 
the Fed did not replace the system that existed under the National Banking Acts of 1863 and 
1864 but, rather, it was superimposed on the national banking system created by these acts. 
Certain provisions of the National Banking Acts, however, were modifi ed to permit greater 
fl exibility of operations.
The Fed system consists of fi ve components:
Member banks
Federal Reserve District Banks
Board of Governors
Federal Open Market Committee
Advisory committees
These fi ve components are depicted in