Although Congress created the nation's central bank in the form of the Federal Reserve, the Federal Reserve Bank is actually independent of Congress and is formally decentralized. The Fed has Reserve Banks and branches in twelve districts across the country, although it a Board of Governors located in Washington, D.C formally oversees its actions. The Fed receives no government appropriations, but funds its activities with the interest earned from loans to banks and investments in government securities and from the revenue it receives from providing services to financial institutions.

             Before there was a central bank, bank notes were backed with gold and silver. However, bank runs were frequent, when many people in a single day would demand to have their banknotes exchanged for the gold or silver the banks has in reserve. As a result of bank runs, banks would sometimes refuse to make loans and accumulate large shares of gold and silver. This created an ineffectual national monetary policy, as the currency was not regulated by the needs of the economic cycle of recession and depression, but by consumer or banking fears and whims. .

             Today, the Federal Reserve Bank can, for example, raise interest rates if there is an indication that inflation is threatening to spiral out of control in an overheated economy, or lower interest rates to encourage consumers to spend money. For example, at what rate would you be more likely to borrow money?.

             4.5%.

             3.5%.

             Obviously, the lower rate of interest on the money you must pay back to a bank makes borrowing more attractive. However, for a consumer desiring to save money, a higher rate of interest means that it is smarter to save his or her money, as the money gaining interest in the bank is 'paying' the saver more than he or she would gain from spending it in the open market.

             The Fed has three major other tools to orchestrate the economy-the discount rate, reserve requirements and, open market operations.