After much debate, Congress passed the Reserve Act, which was signed into law by President Woodrow Wilson, on December 23, 1913. The Act stated that its purpose was to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of discounting commercial paper, and to establish a more effective supervision of banking in the United States. Soon after the creation of the Federal Reserve, it became clear that the act had broader implications for national economic and financial policy. As time has passed, further legislation has clarified and supplemented the original purposes.

The Federal Reserve System is considered to be an independent central bank. It is, however, only in the sense that its decisions do not have to be ratified by the President or anyone e

The implications of changes in interest rates extend beyond domestic money and credit markets. If the interest rates in the U.S. move higher in relation to those abroad, holding assets denominated in U.S. dollars become more appealing, and the demand for dollars in foreign exchange markets increases. A result is upward pressure on the exchange value of the dollar. With flexible exchange rates the dollars strengthens, the cost of imported goods to Americans declines, and the price of U.S. produced goods to people abroad rises. As a consequence, demands for U.S. goods are reduced as Americans are induced to substitute goods from abroad for those produced in the United States and people abroad are induced to buy fewer American goods. Such changes in the demand for goods and services get translated into changes in total production and prices.

A major component of the System is the Federal Open Market Committee (FOMC), which is made up of the: Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks, (who serve on a rotating basis). The FOMC oversees open market operations, which is the main tool used by the Federal Reserve to influence money market conditions and the growth of money and credit. Two other groups play roles in the way the Federal Reserve System works: depository institutions (through which the tools of monetary policy operate), and advisory committees (which make recommendations to the Board of Governors and to the Reserve Bans regarding the System's responsibilities).

The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement.

The board of Governors of the Federal Reserve System determines the reserve requirements of the member banks within statutory limits, reviews, and determines the discount rates established pursuant to the Federal Reserve Act to serve the public interest. The Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago, San Francisco, Cleveland, Ohio; Richmond, Virginia; Atlanta, Georgia; Saint Louis, Mo.; Minneapolis, Minnesota; Kansas City, Mo.; and Dallas Texas. The Federal Open Market Committee, consisting of the seven members of the Board of Governors and five members elected by the Federal Reserve banks, is responsible for the determination of Federal Reserve Bank policy in the purchase and sale of securities on the open market. The Federal Advisory Council, whose role is purely advisory, consists of 12 members if they meet membership qualifications. The Federal Reserve System exercises its regulatory powers in several ways, the most important of which may be classified as instruments of direct or indirect control.

The Board's supervisory responsibilities extend to the roughly 1,000 s

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Approximate Pages = 8 (250 words per page double spaced)