The Fed holds reserves in banking systems and pay interest to those banks for holding their money.
The Federal Reserve Bank is known as the \”banks of banks\”. Its purpose is to: conduct monetary policy by influencing monetary conditions in the economy, supervise and regulate banks and financial firms for safety, maintain a stable financial system, and provide financial services to the United States government (Federal Reserve, 2016). Part of this function is the creation and destruction of money, the most known is by printing and destroying actual paper dollars and metal coins. The other method is through the credit system, the reserve creates accounts that are then deposited into bank reserves to be loaned out, eventually earning interest on both sides of the system, effectively multiplying the amount that was put into circulation (Ross, 2021). The Fed holds reserves in banking systems and pay interest to those banks for holding their money. By doing all of this and depending on what they do with their reserves, the Fed can create money, add money and remove money from circulation (Gwartney, et. al., 2018).
Some Pros of the Fed are; by overseeing the actions of banks and by creating some monetary policy the private sector is protected from predatory lending, it creates a uniform and sound financial system with a national currency, it ensures a credible and reliable form of currency. Some cons are; it is an extremely powerful form of government that may be considered anti-capitalist, it controls the direction the economy moves in through interest rates, there is room for corruption within the reserve (Lombardo, 2016).
At its most prominent functions, The Federal Reserve is a necessary institution in the United States. Examples of government managed currencies such as Zimbabwe show the corruption and poor practices that the Federal Reserve prevents (Gwartney, et. al., 2018). Protecting a national currency and avoiding over-inflation and under-inflation is necessary in protecting the well being of a nation.
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