The Federal Reserve System of the United States performs many of the function of the Central Bank of other countries. The territory of the United States is divided into twelve Federal Reserve Districts, each one of which has a Federal Reserve Bank in a major city. Policies of these twelve banks are uniform, however, because they are set by the Board of Governors of the Federal Reserve System.
It is precisely this Federal Reserve Boar That Carries out operations similar to those that are the responsibility of Central Banks in Europe, Latin America and elsewhere. For instance, member banks, are told by the Federal Reserve Board what current reserve requirements are, that is, the mandatory cash ratio of holding to liabilities. Federal Reserve Banks may extend credit to member banks through advance or rediscounts. The rediscounting rate is set by each of the individual member banks. The board is also empowered to conduct certain open-market operations that can effect the money supply of the United States. For instance, the board can buy or sell United States Government securities, thus increasing or decreasing the amount of money on circulation. Other open-market interventions of the Federal Reserve Banks include the purchase and sale of investments such as bankers acceptances and bills of exchange.
The Federal Reserve Board can also influence the volume of activity on the Stock Exchange by setting margin requirements for the purchase of securities. In other words, the Federal Reserve Board can set the percentage of the market price of securities that a buyer must pay when buying stocks or bonds with a loan. Margin requirements thus limit the amount of credit that purchasers of securities may be given to finance their investment activity. By raising or lowering margin requirements, the Federal Reserve Board may limit or expand the volume of stock purchase.
