13. THE CENTRAL BANKS OF EUROPE AND THE UNITED STATES
We explain the structure of the world’s two largest and most powerful central banks in this
chapter: The Federal Reserve System (Fed) and the European Central Bank (ECB). The Fed has
an unusual structure because Congress and the President decentralized the power of its central
bank, where each central bank branch can tailor services for its unique region of the United
States. Moreover, the Board of Governors manages the Fed, while the Federal Open Market
Committee handles the purchase and sale of the U.S. government securities and other assets.
Keeping it straight, the Board of Governors devises monetary policy, while the Open Market
Committee puts monetary policy into action. Then we shift focus to the structure of the
European Central Bank, whose structure mirrors the United States. The Executive Board devises
monetary policy while the Governing Council implements it. Finally, a central bank should
remain independent of its government because a self-governing central bank can focus on price
stability and low inflation.
Why the U.S. Government Created Federal Reserve System
The United States was a late comer to the world when it created its central bank. The U.S.
government permanently established a central bank in 1913 and named it the Federal Reserve
System. Congress, government officials, and the public did not want to create a powerful
financial institution, so the U.S. government created the Federal Reserve System to have many
checks and balances. Most European countries formed their central banks in the 17, 18, and 19th
centuries. They converted a large private bank into a central bank. For example, Great Britain
established the Bank of England in 1694, and France founded the Bank of France in 1800.
The Federal Reserve System comprises of 12 Federal Reserve banks. The United States is
decomposed into 12 regions, and each region has a Federal Reserve Bank as shown in Figure 1.
The Board of Governors is located in Washington D.C. while the dots show the headquarters for
each Federal Reserve bank within its region. The Fed is spread across 12 banks because each
section of the country is economically different. For example, Michigan originally manufactured
U.S. cars while Texas and Oklahoma supplied oil and natural gas. Therefore, a Federal Reserve
Bank can provide services to its unique region. Originally, each Federal Reserve Bank provided
the following functions:
A Fed bank clears checks for banks. A Fed bank regulates member commercial banks. A Fed bank manages the currency by issuing new currency and removing old, worn-out
currency.