Kelvin Chapman, age 12, of Colonial Heights, Virginia, for his question:

What is the function of the Federal Reserve System?

A listener from another planet might conclude that the world's biggest headache is money. Almost everybody strives to get more than they have so there is never enough to go around. Or so it seems. We may think we have money troubles nowadays. But the financial panics that occurred before the Federal Reserve System was established were downright disasters.

Banks most likely began when people needed safe places to stash their savings and other valuables. Sooner or later bankers realized that these hordes of wealth could and should be multiplying. So they loaned out portions of their reserves to people who wanted to buy property, start businesses and such. They paid a small interest to depositors and charged a somewhat larger rate to the borrowers.

This was a fine idea and everybody should you would think, make a profit. But people tend to get very excited about money and in the 1800s the growing national economy got out of hand. There were frantic booms when business was good and desperate busts when business was bad. During a good spell, when money seemed endless, many banks over¬extended their loans. When a bad time arrived, often overnight, they had no reserves to repay their clamoring depositors. Many ordinary folk lost all of their savings and the nation's economy sunk deeper into the slump    until some mysterious happening started an uptrend to the next boom.

In 1913, the Federal Reserve System was set up to protect both the ordinary citizens and their bankers and also, if possible, to rein in the up and down economy. It functions as a sort of super bank for all the government's business, at home and abroad, and also shelters a multitude of previously unrelated commercial banks under its wing.

Booms and busts may come and go, but hard working pixies and paper boys who stash their savings in FRS member banks will not get wiped out overnight.

The system is designed to guide all aspects of the economy, rather than restrict it with ironclad regulations. All banks with branches in more than one state must be FRS members and most local banks are glad to belong.

The FRS limits the amount of money a bank may loan. A certain. percentage of its wealth must be held in reserve by the government. The FRS also sets certain interest rates and adjusts them to modify the ups and downs of the economy. When business is slack, it can lower reserve requirements. The banks then can loan money to more people to give business a boost.

Of course, there is much more to the Federal Reserve System than we can crowd into a column. It is, without a doubt, the biggest and possibly the most sensible banking system in all history. To run its daily routine, the United States is divided into twelve Federal Reserve Districts, each administered by a local Federal Reserve City.