James Bartek Jr., age 16, of White Plains, N.Y., for his question:
CAN YOU EXPLAIN THE FEDERAL RESERVE SYSTEM?
The Federal Reserve System (FRS), sometimes called the Fed, is the central banking organization of the United States. The prime duty of the Fed is influencing the flow of money and credit.
All national banks must belong to the FRS. State banks are allowed to join if they meet certain requirements. About 6,000 banks belong to the system.
The Fed acts as a banker to both the government and the banking community. It issues currency and regulates the monetary and banking system.
There are 12 Federal Reserve districts covering the United States and each has one Federal Reserve Bank. In addition, there are also 24 Federal Reserve Bank branches within the 12 districts.
The 12 Federal Reserve Banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.
The Federal Reserve System was established in 1914. For a number of years before the Fed was formed, surging economic growth was interrupted often by economic crisis. Sometimes these times were also combined with the collapse of the monetary system. It seemed that the U.S. banking system couldn't respond quickly to business cycles.
All national banks were then required to hold certain reserves. As country banks called for more money to meet their customers requirements, the national banks could respond.
The Fed sets reserve requirements for member banks. Not all of a bank's reserves can be used to make loans.
The Fed influences credit condition with a discount rate. This is the rate that banks must pay when they borrow money from Federal Reserve Banks. If the Fed increases the rate of discount, banks tend to charge customers higher interest rates.
The Fed sets margin regulations for some types of stock transactions. The margin is the amount of cash a buyer must deposit with his broker when he buys securities. Before margin amounts were set, buyers could buy large amounts of stock almost completely on credit. This often opened the way to dangerous speculation.
The Fed also acts as a clearing house for trillions of dollars in checks each year for United States banks.
Heading the organization is a Board of Governors. There's a seven member board made up of five Presidential appointees, each from a different district, as well as the secretary of the Treasury and the Comptroller of the Currency.
In 1913 the appointees served for 10 years in staggered terms so that no two would end at the same time. The Banking Act of 1935 extended these terms to 14 years and gave the members greater power.