Page 295 - Krugmans Economics for AP Text Book_Neat

What you will learn
in this Module:

Module 26 • The history of the Federal
Reserve System
The Federal Reserve • The structure of the Federal
Reserve System
• How the Federal Reserve
System: History has responded to major
financial crises

and Structure

The Federal Reserve System

Who’s in charge of ensuring that banks maintain enough reserves? Who decides how
large the monetary base will be? The answer, in the United States, is an institution
known as the Federal Reserve (or, informally, as “the Fed”). The Federal Reserve is a
central bank—an institution that oversees and regulates the banking system, and con-
trols the monetary base. Other central banks include the Bank of England, the Bank of
Japan, and the European Central Bank, or ECB.

An Overview of the Twenty-first Century
American Banking System

Under normal circumstances, banking is a rather staid and unexciting business. Fortu-
nately, bankers and their customers like it that way. However, there have been repeated
episodes in which “sheer panic” would be the best description of banking conditions—
the panic induced by a bank run and the specter of a collapse of a bank or multiple
banks, leaving depositors penniless, bank shareholders wiped out, and borrowers un-
able to get credit. In this section, we’ll give an overview of the behavior and regulation
of the American banking system over the last century.
The creation of the Federal Reserve System in 1913 was largely a response to lessons
learned in the Panic of 1907. In 2008, the United States found itself in the midst of a fi- A central bank is an institution that
nancial crisis that in many ways mirrored the Panic of 1907, which occurred almost ex- oversees and regulates the banking system
actly 100 years earlier. and controls the monetary base.

module 26 The Federal Reserve System: History and Structure 253