Ch a p ter 14 Structure of Central Banks and the Federal Reserve System. Among the most important players in financial markets throughout the world are central banks, the government authorities in charge of monetary policy. | Part IV Central Banking and the ConduCt of Monetary Policy Chapter 14 Structure of Central Banks and the Federal Reserve System PREVIEW Among the most important players in financial markets throughout the world are cen- tral banks the government authorities in charge of monetary policy. Central banks actions affect interest rates the amount of credit and the money supply all of which have direct impacts not only on financial markets but also on aggregate output and inflation. To understand the role that central banks play in financial markets and the overall economy we need to understand how these organizations work. Who controls central banks and determines their actions What motivates their behavior Who holds the reins of power In this chapter we look at the institutional structure of major central banks and focus particularly on the Federal Reserve System the most important central bank in the world. We start by focusing on the formal institutional structure of the Fed and then examine the more relevant informal structure that determines where the true power within the Federal Reserve System lies. By understanding who makes the decisions we will have a better idea of how they are made. We then look at several other major central banks and see how they are organized. With this information we will be more able to comprehend the actual conduct of monetary policy described in the following chapters. Origins of the Federal Reserve System Of all the central banks in the world the Federal Reserve System probably has the most unusual structure. To understand why this structure arose we must go back to before 1913 when the Federal Reserve System was created. Before the twentieth century a major characteristic of American politics was the fear of centralized power as seen in the checks and balances of the Constitution and the preservation of states rights. This fear of centralized power was one source of the American resistance to the establishment of a central bank see .
