Function
The Federal Reserve System provides the government with a ready source of loans and serves as the safe depository for federal monies. The Federal Reserve is also a low-cost mechanism for transferring funds and is an inexpensive agent for meeting payments on the national debt and government salaries. The Federal Reserve Banks were created as instrumentalities to carry out the policies of the Federal Reserve System.
The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6% per year.
The dividends paid to member banks are considered partial compensation for the lack of interest paid on member banks' required reserves held at the Federal Reserve. By law, banks in the United States must maintain fractional reserves, most of which are kept on account at the Federal Reserve. Historically, the Federal Reserve did not pay interest on these funds. The Federal Reserve now has authority, granted by Congress in the Emergency Economic Stabilization Act (EESA) of 2008, to pay interest on these funds.
A major responsibility of The Federal Reserve is to oversee their banking and financial systems. Overseeing the banking and financial systems of a bank is crucial in a society.
Confidence in the soundness of the banking and financial systems is what mobilizes a society's savings, allows the savings to be channeled into productive investments, and encourages economic growth.
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