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State the purpose behind the establishment of the Federal Reserve System and briefly explain its function.
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Business and Its Environment
Edition: 7th
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The Federal Reserve System was established in 1913 and serves as the central bank of the United States. It has broad responsibilities for managing the money supply and has regulatory authority over national banks and state banks that participate in the Federal Reserve System. The Federal Reserve provides liquidity to the financial system through its credit window and has certain regulatory responsibility pertaining to consumer credit. The Federal Reserve is governed by a seven-member board of governors whose chairman is Ben Bernanke. The Fed is composed of 12 regional Federal Reserve Banks, and the Federal Reserve Bank of New York serves as overseer of banks and managed the bailout of banks during the financial crisis. The Federal Reserve is independent of the presidential administration, although the members of the board of governors are appointed by the president and confirmed by the Senate. The term of office for a board member is 14 years, and the chairman and vice chairman have 4-year terms. The Federal Reserve is also independent of the congressional budget process, since it earns large profits that finance its operations with its surpluses paid to the Treasury. The Federal Reserve is thus an independent central bank. The Federal Reserve is subject to the acts of Congress, and Congress has refrained from altering its independence. Congress has, however, assigned the Fed certain responsibilities for consumer credit giving it rule-making authority over the practices of credit card companies, particularly focusing on disclosure. The Federal Reserve also has responsibilities for certain lending practices, such as the subprime lending by consumer finance companies.
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