What you will learn
in this Module:
- The history of the Federal
Reserve System - The structure of the Federal
Reserve System - How the Federal Reserve
has responded to major
financial crises
module 26 The Federal Reserve System: History and Structure 253
Module 26
The Federal Reserve
System: History
and Structure
The Federal Reserve System
Who’s in charge of ensuring that banks maintain enough reserves? Who decides how
large the monetary base will be? The answer, in the United States, is an institution
known as the Federal Reserve (or, informally, as “the Fed”). The Federal Reserve is a
central bank—an institution that oversees and regulates the banking system, and con-
trols the monetary base. Other central banks include the Bank of England, the Bank of
Japan, and the European Central Bank, or ECB.
An Overview of the Twenty-first Century
American Banking System
Under normal circumstances, banking is a rather staid and unexciting business. Fortu-
nately, bankers and their customers like it that way. However, there have been repeated
episodes in which “sheer panic” would be the best description of banking conditions—
the panic induced by a bank run and the specter of a collapse of a bank or multiple
banks, leaving depositors penniless, bank shareholders wiped out, and borrowers un-
able to get credit. In this section, we’ll give an overview of the behavior and regulation
of the American banking system over the last century.
The creation of the Federal Reserve System in 1913 was largely a response to lessons
learned in the Panic of 1907. In 2008, the United States found itself in the midst of a fi-
nancial crisis that in many ways mirrored the Panic of 1907, which occurred almost ex-
actly 100 years earlier.
Acentral bankis an institution that
oversees and regulates the banking system
and controls the monetary base.