Editing Federal Reserve (section)

=== Addressing the problem of bank panics ===
{{Further|Bank run|Fractional-reserve banking}}

Banking institutions in the United States are required to hold reserves{{Nsmdns}}amounts of currency and deposits in other banks{{Nsmdns}}equal to only a fraction of the amount of the bank's deposit liabilities owed to customers. This practice is called [[fractional-reserve banking]]. As a result, banks usually invest the majority of the funds received from depositors. On rare occasions, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating; this is called a [[bank run]]. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a [[lender of last resort]] when a bank run does occur. Many economists, following [[List of Nobel Memorial Prize laureates in Economics|Nobel]] laureate [[Milton Friedman]], believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of 1929; Friedman argued that this contributed to the [[Great Depression]].<ref name="Federal Reserve Board">{{Cite web |last=Bernanke, Ben |date=October 24, 2003 |title=Remarks by Governor Ben S. Bernanke: At the Federal Reserve Bank of Dallas Conference on the Legacy of Milton and Rose Friedman's ''Free to Choose'', Dallas, Texas |url=http://www.federalreserve.gov/boardDocs/Speeches/2003/20031024/default.htm |format=text}}; FRB Speech: [http://www.federalreserve.gov/boarddocs/speeches/2002/20021108/default.htm FederalReserve.gov: Remarks by Governor Ben S. Bernanke, Conference to Honor Milton Friedman, University of Chicago, Nov. 8, 2002]; {{Cite book |last1=Milton Friedman |url=https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You're%20right%20We%20did%20it%22 |title=The Great Contraction, 1929–1933 |last2=Anna Jacobson Schwartz |publisher=[[Princeton University Press]] |year=2008 |isbn=978-0-691-13794-0 |edition=New |page=247 |chapter=B. Bernanke's speech to M. Friedman}}</ref>

==== Check clearing system ====
Because some banks refused to [[Clearing (finance)|clear]] checks from certain other banks during times of economic uncertainty, a check-clearing system was created in the Federal Reserve System. It is briefly described in ''The Federal Reserve System{{Nsmdns}}Purposes and Functions'' as follows:<ref>{{Harvnb|BoG|2005 | pp=83}}</ref>

{{Blockquote|By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The System, then, was to provide not only an elastic currency{{Nsmdns}}that is, a currency that would expand or shrink in amount as economic conditions warranted{{Nsmdns}}but also an efficient and equitable check-collection system.}}

==== Lender of last resort ====
In the United States, the Federal Reserve serves as the [[lender of last resort]] to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses" which operated during the [[History of central banking in the United States#1837–1862: "Free Banking" Era|Free Banking Era]]; whether public or private, the availability of liquidity was intended to prevent bank runs.<ref>{{Cite web |url=https://www.minneapolisfed.org/glossary.cfm?js=0#l |title=Lender of last resort |publisher=[[Federal Reserve Bank of Minneapolis]] |access-date=May 21, 2010 |archive-date=January 25, 2010 |archive-url=https://web.archive.org/web/20100125071643/http://www.minneapolisfed.org/glossary.cfm?js=0#l |url-status=dead }}; {{Cite SSRN |title=Lender of Last Resort: The Concept in History |last=Humphrey |first=Thomas M. |date=January 1, 1989 |ssrn=2125371}}</ref>

==== Fluctuations ====
Through its [[discount window]] and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer-term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is called the discount rate (officially the primary credit rate).

By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.<ref name="dfeverydayecon"/> For example, on September 16, 2008, the Federal Reserve Board authorized an $85&nbsp;billion loan to stave off the bankruptcy of international insurance giant [[American International Group]] (AIG).<ref name="Federal Reserve-AIG Press Release-2008-09-16">{{Cite web |date=September 16, 2008 |title=Press Release: Federal Reserve Board, with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) |url=http://www.federalreserve.gov/newsevents/press/other/20080916a.htm |access-date=August 29, 2011 |publisher=Board of Governors of the Federal Reserve}}; {{Cite news |last1=Andrews |first1=Edmund L. |last2=de la Merced |first2=Michael J. |last3=Walsh |first3=Mary Williams |date=September 16, 2008 |title=Fed's $85 Billion Loan Rescues Insurer |work=The New York Times |url=https://www.nytimes.com/2008/09/17/business/17insure.html |access-date=September 17, 2008}}</ref>