The United States of America was founded as a capitalist nation dependent on independent trade by privately owned businesses. This system of economics stays as far away as possible from a centralized government controlled economy. However, as generations of economists, politicians, and businessmen carried out the principles of the Constitution, it became apparent that some centralized bank was required to maintain stability and order in the national economy. This central bank is known as the Federal Reserve, and its Chairman is responsible for maintaining a positive economy through several powers. The current Chairman is Alan Greenspan, a man responsible for controlling a stable economy through several checks and balances.

The Federal Reserve was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Today the Federal Reserve's duties fall into four general areas: conducting the nation's monetary policy; supervising and regulating banking institutions and protecting the credit rights of consumers; maintaining the stability of the financial system; and providing certain financial services to the U.S

Woodward, Bob. Maestro: Greenspan's Fed and the American Boom. Simon & Schuster, New York: 2000.

The discount rate is the amount of interest the Fed charges banks for overnight loans. The Federal Reserve sets a percentage of deposits that all banks must keep in cash, this is called the reserve requirement. If a bank loans out to much money, they have to borrow from the Fed to meet the requirement. If the discount rate is lower than the rates banks can charge on loans, they will loan out more money, increasing the money supply. If the discount rate is higher, banks will loan out less money (Grieder 50).

The reserve requirement is a percentage of deposits that banks are required to hold in cash. If the reserve requirement is high, banks must keep more money in their vaults, instead of loaning it out. If the reserve requirement is low, banks can make more loans and increase the money supply (Mullins 99-101).

Another method Greenspan and company use is price control. Price controls occur whenever the government tries to set a price above or below the market price. They are refereed to as price floors and price ceilings. A price floor is a legal minimum price set above the market price. An example is minimum wage. Minimum wage sets a higher hourly wage then most employers would normally pay. This has the effect of reducing the number of jobs, because employers will have to pay more for the same work. With a higher price on labor, employers will demand fewer workers. Price ceilings have the opposite effect. They are a legal maximum price normally set beneath the market price. Rent controls are a perfect example. When the government sets a maximum rent, landlords are likely to find another way to make money with their property. The government lowers the price, so landlords will be willing to supply less room for rent (Martin 67-68).

Grieder, William. Secrets of the Temple: How the Federal Reserve Runs the Country. Touchstone Books, San Fransisco: 1989.

Another principle behind the Federal Reserve is the Phillips curve. Named for economist William Phillips, the Phillips curve demonstrates an inverse relationship between inflation and unemployment. Its main implication is that low inflation and low unemployment are incompatible. This theory holds true most of the time, but has had some significant failures. Most recently in the US, we had high inflation and high unemployment during the administration of Jimmy Carter. And during the Bush and Clinton administrations, largely due to Alan Greenspan we have

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