What is the Federal Reserve System? – Definition & history

Federal Reserve System of the United States logo

The Federal Reserve is the centrally backed banking system of the United States of America and was established with the enactment of the Federal Reserve Act in 1913. The Fed, as it is more colloquially referred to, was created with two major goals in mind, namely the dual mandate, which are to maximize employment among the public, reduce inflation and stabilize prices. 

Along with the other major tasks of regulating all other banks and also handling the government’s treasury, the Federal Reserve is the central banking institution of the United States.

Activities undertaken by the Federal Reserve System

Federal Reserve Bank

Monetary policy

The chairman of the Fed, along with his board of advisors, in conjunction with the President, enact all monetary policies, which must always be geared toward improving the quality of life of the average American citizen, reducing long-term interest rates, reducing debt, and increase lending.

Stability and risk mitigation

The Fed monitors all systemic risk possibilities and assesses strategies to minimize the chances of total economic collapse or recessions. They have executive power in many cases for short-term decisions and bailout appeals.


The Fed is involved in active monitoring of the activities of banks and individuals as well, in certain cases. It keeps them in check whenever needed with inquiries, sanctions, and in the most extreme cases, fines.

Payments, depositories, bonds

The Fed offers investment opportunities for banking institutions and individuals who wish to invest in government-backed bonds. They facilitate most of the electronic as well as paper transactions and, are involved with the Mint in regulating currency production as well.

Consumer protection

The ability to take up consumer cases and create consumer-oriented rules and community-building activities the Fed is some of the lesser-known functions of the Fed. The Fed actively undertakes research projects to identify consumer grievances.

History and background

The building of the Federal Reserve Bank

The Federal Reserve Act is purportedly vague about the concept of a single central bank with hegemonic power. Instead, it opts to delineate a structural hierarchy of 12 Reserve Banks, with a decentralized committee for decision-making and features of both Public and Private banking structures. 

The framers of this act were influenced and lobbied by the powerful bankers of the 1900s, post-dust-bowl, and pre-Depression era gold rush. This system is, in a way, slightly skewed towards favoring the bankers, especially the most powerful of them all. Still, over time with many amendments and expansions to the concept of a Reserve Bank, the Fed has become more of a parent figure to all banks, bankrolled by the tax paid by the hardworking American Citizen.

The Fed ensures that misuse of regulation and liberalization does not take place, which results in the formation of market bubbles, inflation, and ultimately, a recession, which in the worst cases may turn into a full-blown depression. Although there have been some instances where the Fed has been lackluster at its job, without the watchful eye of the Fed, plenty of banks would damage the economy to the point of return with their current practices.

The Federal Reserve is ultimately composed of three bodies, which operate independently and in tandem as well. These are the Federal Reserve System, The Reserve Banks belonging to different states, and the Federal Open Market Committee (FOMC), of which the latter is a newer addition. Together, they shape the monetary policy of the country and affect the economy of the world for the better.

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