The reason behind this was due to the country experiencing a Revolutionary War which left the country with a substantial debt; this was a significant portion just like the one that was issued by individual states. The country did not have a common currency like the other countries who printed their own money. The federal government which took over made a constitution which prohibited the state from issuing their own money. After the bank of united state being conceived in 1790, Hamilton as the secretary of President Washington happened to be an architect of the bank; he suggested that the bank would function as a commercial bank so as to create a source of capital for the nation's economy. This lead to the formation of the first bank which helped to pay war debt and also helped in commercial operations .Thus it could not join central bank. Due to the War in 1812, the federal debt stated mounting again and this forced the united state to form a Second Bank which functioned as a clearinghouse. This was because most of the state- chartered bank suspended their specie payment.
If Federal Reserve was eliminated some central banks in some country such as in England would not be termed as a government's banker, this would also lead to the central bank having no reputation thus it would not receive deposits and also it would not act as a banker's bank to the other banks. Monetary policy would also not have developed since the central bank would not have any power to issue any currency. Financial transfer and also the processing of the checks would still be in the hands of the private clearinghouses and this would lead exploitation of the bank.
The 12 reserved banks made the system to be more innovative and more flexible and it also ensured that all its decisions and its actions were broadly based. This was because it had private and also public aspects in that the government exercised control by appointing and also setting salaries of the highest-level employees. After the president choosing the members of the board of governor he gave the congress an opportunity to confirm if it was fairly done.
The president is responsible for choosing the Board of Governors who in turn are approved by the congress. The members Board of Governors are not supposed to invest in financial institutions in accordance to the Law. They should also come from diverse backgrounds. Also the Board of Governors is required by the law to provide the congress with annual reports. On the other hand, the congress has the powers to amend what is passed by Fedis if not satisfied. The branches can participate in voting through 6 out of 9 board members locally based through the approval of the Board of Governors. The monetary policy used in making the Fed was made independent from interference by political sources. This has in turn led to more openness during their meetings.
The discount rate is determined by the Federal's reserve bank directors. However the Board of Governor reviews and determines the discount rate in districts. On the other hand the Federal Reserve banks make the decision on which bank to offer discount loans and which not to. Also the Federal Reserve banks choose one commercial banker from district's bank who serves in the Federal Advisory Council. This Council consults with Board of Governors on the conduct of the monetary policy. At least 5 of the 12 Federal Reserve Banks are allowed to vote in the open market Committee through their president to control their operations that is, sales and purchases of government securities which have effect on the reserves in bank systems and the interest rates
The Federal Reserve System and the Board of Governors are the controllers of the discount rates. Also The Federal Reserve System is responsible for the setting of reserve requirement. On the other hand the Federal Open Market Committee (FOMC) sees into the setting of Open Market Operation. The U.S. monetary policy is normally implemented by the Federal Reserve implement through impacting on the market conditions existing in the market for the particular depository institutions that tend to hold at the Federal Reserve Banks. The particular operating objectives or rather the targets that it applied in ensuring standard conditions have changed of late.
The political business series takes place due to the actions of the federal government following expansionary economic guidelines throughout election years, followed by constricting the financial system after voting to district off price rises. 14-year NON-renewable terms for governors effectively insulate the Board of Governors from political pressure. Incase Fed was not sovereign from the central government, then both economic policy as well as financial policy would be issue to the political drive of increasing the financial system to guarantee the re-election of current politicians.
There is a big similarity when comparing the two systems of organizations. Fed consists of twelve district banks as well as the panel of Governors, having demonstration from mutually public as well as confidential industries. In the ECB, the nationwide central banks runs to a great extent similar to the district banks in the United States, whereas the executive board of ECB is to a great extent like the panel of committee.
Nevertheless several structural dissimilarities are observed. First, the financial plans meant for the district banks in the Fed are recognized by the Board of committee, whereas the nationwide central banks in Europe are the responsible to funding the administrative Board. Second, although popular voting in the twelve member FOMC sets out to the 7-member panel of Governors, the fifteen nationwide central banks in the ECB jointly have a greater part in the prevailing Council in this case; complement to the FOMC comprising of the fifteen nationwide central bank heads as well as the associate Executive panel. Lastly, the ECB is not much involved in the management and instruction of financial bodies as the Fed.
When looking at the issue of freedom, the Fed has extra aim liberty while the ECB is politically more self-governing. The Fed has freedom to follow both low joblessness and short inflation, whereas the ECB is authorized to control cost stability. The ECB is not more vulnerable to political whims, however, every change in the structure of ECB or organization would need undisputed transformation to the Maastricht agreement through all parties while an alteration to the Fed's association as well as structure may well be approved by a straightforward majority in assembly.
To preserve the Federal Reserve from temporary political forces, the Fed was set up to be self-governing inside the administration. The Fed runs on its personal incomes rather than on congressional appropriations, furthermore the associates of its panel of Governors are allotted for extended, spread out terms, restraining the pressure of habitual political contemplations.
Nevertheless the Federal Reserve works in the government by sense that it prepares monetary rule to attain overall objectives placed by assembly as well as the president. Even though the exact decisions of the Federal Reserve never have to be accepted by the leader or the managerial branch, the Fed ought to report to founder assembly. Congress has the mandate to adjust or even eliminate the Federal Reserve at whichever time.
The unique structure of fed offer internal checks along with balances; thus making sure that its judgments as well as functions are never subjugated by whichever branch of the organization.
The Fed can never manage inflation or manipulate output and services in a straight line; in its place, it influences them ultimately, mostly by increasing or lowering a temporary interest rate described as federal fund rate. Frequently, it does this with help of open market procedures in the market for bank treasury, identified as the federal funds market. United state makes us of The Federal Open Market Committee (FOMC) as its primary tool to control fed. The board sets financial strategy by spelling out the temporary aims for those functions, which is presently a target point for the centralized funds charge in this case; the rate that profitable banks charge among them for immediately credits. The FOMC too directs actions carried out by the Federal Reserve System in overseas exchange markets, though any obstruction in distant exchange markets is synchronized with the United State coffers, which has accountability for preparing United State rules on the subject of the exchange worth of the money.