Francis McKee Jr., age 15, of Billings, Mont., for his question:
WHAT IS THE FEDERAL RESERVE SYSTEM?
The Federal Reserve System, created by an act of Congress in 1913, serves as the central banking authority of the United States and as fiscal agent for the government. The organization actually has wide powers in controlling credit and the flow of money.
The system has 12 Federal Reserve banks, a Board of Governors, a Federal Advisory Council, the Federal Open Market Committee and many member banks. There are something like 14,000 banks in the United States today and about 6,000 of them are members of the Federal Reserve System.
The country is divided into 12 districts, and a Federal Reserve Bank is located in the principal city of each district. The banks are organized and operated under federal laws as well as the state laws where they are located.
Supervising the system is a Board of Governors that has seven members appointed by the president of the United States for terms of 14 years. Assisting the Board is a Federal Advisory Council that has 12 members, one from each district. The Council meets at least four times a year to make recommendations for the operation of the system.
A Federal Open Market Committee has seven members that decide on policies for the buying and selling of government securities by Federal Reserve Banks in the open market.
The 12 federal banks are bankers' banks. This means that they serve only their member banks and do not deal directly with individuals or business firms. Individuals and business concerns, however, can deposit money with member banks in the form of savings and checking accounts. The banks then set aside a certain percentage of these deposits as a reserve.
Reserve Banks may also make loans to member banks when they need additional reserves.
When member banks do not have enough currency in their vaults to meet their business needs, they can get additional funds by writing checks on their accounts with the Reserve Banks.
The original purposes of the Federal Reserve System were to make it possible to increase and decrease the supply of money to fit the needs of business, and to improve the supervision of banking. Over the years these original purposes have been kept but have gradually become parts of a broader goal.
Today's goal is to help make the ups and downs in levels of prices, income and employment fewer and smaller. To do this the system tries to keep some controls on money and credit. This broader goal is actually now the primary purpose of the Federal Reserve System.
The levels of prices, income and employment depend a great deal on the total money spent for goods and services by consumers, business and government. When there is likely to be too much spending, the Federal Reserve can discourage spending by making money and credit more expensive and difficult to get.
When there is likely to be too little spending, the Federal Reserve can encourage spending by making money and credit easier and less expensive.