Why does the U.S. have a Federal Reserve System anyway?

Money in most countries in the world is issued by a central bank that is granted the monopoly right to issue the nation's currency.

In the United States, the central bank is actually a system of 12 regional banks that are controlled by the Federal Reserve Board of Governors in Washington, D.C.

The Federal Reserve System, or Fed, is legally a private enterprise and is owned by member commercial banks. Effectively, however, the Fed is the fourth branch of the government.

The members of the Fed's Board of Governors are all appointed by the president of the United States.

One of these is selected every four years to serve as the Chairman of the Fed. Currently the Chairman is Ben Bernanke, who served as a member of the Board under the previous chairman, Alan Greenspan.

While the Fed is legally owned by the member commercial banks, these banks have little direct input into the governance of the Fed these days. Member banks elect six of the nine members of each of the 12 regional Federal Reserve Banks' board of directors. This board of directors, in turn, selects a president to run the regional Fed. In practice, the members of the board and the presidents are chosen in Washington by the Board of Governors.

The Federal Reserve has a great many duties.

It was created in 1914 primarily to serve as a lender of last resort and address a long-standing problem the U.S. had been experiencing with bank runs.

Prior to 1914, the U.S. had no central bank. There was a brief period early in U.S. history where the First and Second Banks of the United States were chartered and then disbanded, but these banks served mainly as depository and lending institutions for the U.S. government, and not as modern central banks.

During most of the 19th century and up through 1913, the U.S. had no central monetary authority that would step in and loan funds to banks that were hit with bank runs. As a result, the nation experienced periodic bank panics where runs would occur on several banks simultaneously and led to nationwide financial crises.

The Federal Reserve System was set up to help alleviate this problem.

The Fed has many other duties as well, including regulatory control over banking, facilitation of check clearing and interbank transfers, and maintaining accounts for many U.S. government agencies. The most important role the Fed plays, however, is as a creator and controller of the U.S. money supply.