Group 3 The Federal Reserve: 20th Century Cases and their Historical Implications The Federal Reserve, or simply "The Fed", is the central bank of the United States. It was created by Congress through the Federal Reserve Act of 1913 to provide the nation with a safer and more stable monetary and financial system. The Federal Reserve’s responsibilities fall into four general areas: conducting the nation’s monetary policy through the adjustment of money and credit conditions in pursuit of full employment and stable prices, supervising and regulating banks and other financial institutions to ensure the soundness of the nation's financial system, stabilizing the financial system and balancing systemic risk that may arise in financial markets, …show more content…
Post 1907 Bankers’ Panic, when the writers of the Federal Reserve Act were developing their piece of legislation, they explicitly emphasized the Fed’s role as being lenders. After analyzing the financial system, the Fed discovered a fatal flaw: the currency was not elastic. If a currency is not elastic, it is unable keep up with the behaviors of the economy, and in addition, it is unable to cope with liquidity shocks. Thus, the Federal Reserve Act was created with the intention of creating a currency that is flexible. In order to account for seasonal changes in currency and credit, the Fed used an instrument known as the discount …show more content…
After issuing a large amount of commercial paper and going into bankruptcy, Penn Central’s dilemma triggered a crisis in the non-financial commercial paper market. In order to prevent the widespread negative perception of all other institutions of the commercial paper market, the Fed removed interest rate ceilings on large certificates of deposit, which enhanced the banks’ ability to raise funds to make needed loans. The measures proved successful and the drop was offset fairly quickly by a rise in commercial and industrial lending by banks. Another example that proved valuable precedent post World War II was the failure of Franklin National Bank in the early 1970’s. Franklin National Bank got into financial difficulties and was nearing insolvency. Because Franklin National Bank was highly immersed in the wholesale funding and foreign exchange markets, the Fed provided a considerable amount of discount window lending to replace the wholesale funding that Franklin National could no longer obtain. The Government and the Fed eventually sold off the bank. In the 1980’s, the Fed rescued the Continental Illinois Corporation, which was a commercial industrial loan provider and the eighth largest retail bank in the US. The Fed provided discount window