Kenneth R. Szulczyk
A Fed bank prevents financial panics by being a source of liquidity or emergency loans for
banks during an economic crisis. Each Fed Bank had the power to set the discount rate, or
the interest rate on the loan. A Fed bank collects and publishes data for the public. Each Fed bank employs staff of
economists, researchers, and PhDs, who conduct research for the public interest.Figure 1. The Map of the Federal Reserve Banks
The President and Congress created the Federal Reserve System to prevent financial panics,
such as the Panic of 1907. The New York Stock Exchange plummeted nearly 50% while many
banks teetered on bankruptcy as people began bank runs. Consequently, a Federal Reserve Bank
is a “lender of the last resort.” It provides emergency loans to banks and helps restore
confidence in the banking system. Moreover, the Fed loans were originally discount loans. For
example, a bank needs $9,500, and it asks the Fed for a loan. If the Fed agrees, the bank gives
collateral to the Fed, such as a $10,000 T-bill. Then the Fed increases the bank’s reserves by
$9,5 00 , the loan. The difference between the loan and T-bill is the discount, which reflects the
interest rate the Fed charges for the loan. Economists call this interest rate the discount rate.
Furthermore, the government did not create the Fed to alter the money supply, manipulate
interest and currency exchange rates, or manipulate the financial markets to achieve economic
goals. Nevertheless, the Fed learned to do this during the 1920s.
The Federal Reserve System’s Structure
Unique feature of a Federal Reserve Bank is each bank is a federally chartered corporation.
Each bank has its own stockholders, directors, and a president. Furthermore, every national