What is the central banking system in the US?

Answer 1

A central bank, reserve bank, or monetary authority is the entity responsible for the monetary policy of a country or of a group of member states. It is a bank that can lend money to other banks in times of need.[1] Its primary responsibility is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a lender of last resort to the banking sector during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.

The Fed's power developed slowly in part due to an understanding at its creation that it was to function primarily as a reserve, a money-creator of last resort to prevent the downward spiral of withdrawal/withholding of funds which characterizes a monetary panic. At the outbreak of World War I, the Fed was better positioned than the Treasury to issue war bonds, and so became the primary retailer for war bonds under the direction of the Treasury. After the war, the Fed, led by Paul Warburg and New York Governor Bank President Benjamin Strong, convinced Congress to modify its powers, giving it the ability to both create money, as the 1913 Act intended, and destroy money, as a central bank could. During the 1920s, the Fed experimented with a number of approaches, alternatively creating and then destroying money which, in the eyes of many scholars (notably Milton Friedman), helped create the late-1920s Stock Market bubble. In 1928, Strong died, leaving a tremendous vacuum in Fed governance, from which the bank did not recover in time to react to the 1929 collapse, unlike after 1987's Black Monday. Because of this power vacuum, the Fed adopted what most would consider a restrictive policy by today's standards, exacerbating the crash. After Franklin D. Roosevelt took office in 1933, the Fed was subordinated to the Executive Branch, where it remained until 1951, when the Fed and the Treasury department signed an accord granting the Fed full independence over monetary matters while leaving fiscal matters to the Treasury. The Fed's powers have not significantly changed since 1951, though it has frequently adopted different policy approaches.