 money. It certainly does make the world go around. And the reason it's able to do so is that we trust these little pieces of paper. That's all it is, just a piece of paper. But around the globe there is no piece of paper that inspires more confidence. Take this one for example, we typically call it a $20 bill, but officially it is a Federal Reserve note. Every Federal Reserve note that you spend or receive is part of a complex organization known as the Federal Reserve System. Hello, I'm Charles Osgut. The Federal Reserve System, or the Fed as it's commonly called, is the central bank of the United States. Since its creation in 1913, the Fed's essential mission has remained unchanged, to establish and maintain the public's confidence in our nation's monetary and banking system. Over time, that original mission has expanded to include responsibility for providing a stable, healthy, and growing economy. But the confidence that exists today did not exist during much of our country's early history. Throughout much of the 1800s, almost any organization that wanted could print its own money. As a result, many states, banks, and even one New York drugist did just that. In fact, at one time there were over 30,000 different varieties of currency in circulation. Imagine the confusion. Not only were there multitudes of currencies, some were redeemable in gold and silver, others were backed by bonds issued by regional governments. It was not unusual for people to lose faith both in the value of their currency and in the entire financial system. With many people trying to withdraw their deposits at once, sometimes the banks didn't have enough money on hand to pay their depositors. Then, when the funds ran out, the banks suspended payment temporarily and some even closed. People lost their entire savings and sometimes regional economies suffered. Obviously, something had to be done. And in 1913, something was. In that year, President Woodrow Wilson signed into effect the Federal Reserve Act. This act created the Federal Reserve System to provide a safer and more stable monetary and banking system. The Fed was designed to be a decentralized central bank. The Fed consists of two primary parts, a board of governors, which guides most of the policies of the Fed, and 12 regional Federal Reserve banks and their branches, which are the operating arms that provide services to banks and the public in their regions. The Fed has a unique public-private structure that operates independently within the government, but not independent of it. The board of governors appointed by the president and confirmed by the Senate represents the public sector or governmental side of the Fed. The 12 reserve banks and the local citizens on their boards of directors represent the private sector. This structure provides accountability while avoiding centralized governmental control of banking and monetary policy. The regional reserve banks work with the board of governors to establish and implement monetary policy for the nation. They provide a variety of financial services and they're responsible for supervision of banks and bank holding companies. Of course, all three roles are designed to fulfill the Fed's main goal, a stable economy characterized by higher employment and production, steady growth, and overall stable prices. No small feat. Let's take a look to see how the Fed accomplishes this. The foundation of the Fed rests upon developing and implementing a sound monetary policy for our country, a monetary policy whose primary focus is on price stability. But how does the Fed influence price stability? A large part of the answer occurs right here in this room, because you see it's here that members of the Federal Open Market Committee meet to make decisions that influence financial markets both in the United States and around the world. These decisions affect the amount of money and credit that's available for our economy. All right, you may be asking, but what does the supply of money have to do with price stability? Why don't we see? As the supply of money grows and more money becomes available, the demand for goods also grows. When the supply of money grows faster than the production of goods and services, prices usually begin to rise. This can lead to inflation. On the other hand, if the supply of money decreases, the demand for goods also decreases. In the extreme case, prices could fall and manufacturers and businesses could begin producing fewer goods. We refer to this situation as recession. The goal of the Fed's monetary policy is to stabilize the nation's supply of money and credit and to prevent both inflation and recession. The primary way the Fed does this is by buying and selling government securities. Securities in the form of Treasury bills and bonds represent investments in the United States government. And again, it is in this room that the Federal Open Market Committee sets guidelines for the sale and purchase of these securities on the open market. If the Fed determines that there is too much money in circulation, a situation that could lead to inflation, it will sell securities. This takes excess money out of circulation and helps to stabilize the economy. Conversely, if there is too little money in circulation, which could lead to a recession, the Fed buys securities. This puts money into circulation and again stabilizes the economy. Every business day, the Fed gathers information to determine just how much money needs to be added or subtracted from the nation's money supply. These traders then make the actual sales or purchases of securities that affect the supply. The result? A stable economy characterized by higher employment and production, steady growth, and overall stable prices. Congress establishes rules that govern the supervision and regulation of banks that operate in the United States. The main purpose? To promote the safety and soundness of banks, which in turn enhances the public's confidence in the banking and financial system. And it is the Fed, together with other bank supervisory agencies, that has the responsibility of making sure these rules are followed. In its supervisory role, the Fed monitors banks and bank holding companies, that is companies that own or control one or more banks, and the U.S. operations of foreign banks. Federal examiners look at such items as financial records, the potential risk of the bank's investments, and they also check to see if the bank is following applicable laws. This supervision may be done either offsite, using automated screening tools, or on the bank's premises. In either case, the bank receives a rating. If a potential problem is discovered, the Fed will require that the bank take corrective action. But whether in its supervisory role or in its regulatory role, the Fed's aim is once again to maintain a stable and healthy banking system, capable of supporting economic growth. From its beginning, the Fed has provided a number of services to our country's financial institutions. The Fed plays a vital role in the nation's payments system, that is transferring funds or payments from one bank to another. This is done either as cash or checks and electronic transfers. Because of this role, the Fed is often referred to as the bankers' bank. One of its roles is to act as the fiscal agent or as the bank for the United States. It maintains the U.S. Treasury's accounts, pays checks drawn on the Treasury, facilitates the collection of federal taxes, and is responsible for issuing, servicing, and redeeming Treasury securities. Have you ever thought about how much currency is actually in circulation? Believe me, it's a lot. Almost half a trillion dollars, including the amount of our currency used in other countries. And it's up to the Fed to make sure that there's always enough money in circulation. This means issuing currency and coin to banks, and working with banks to ensure that the currency that is in circulation is genuine and in good condition. The Fed transfers funds from bank to bank in the form of checks and electronic payments. When you write a check drawn on your bank account, the business receiving the check will then deposit it in their bank. But the check by itself has no real value. In order to have value, the funds from your bank have to be transferred to the bank receiving your check for deposit. The transfer of the value from one bank's account to the other bank's account is called settlement. 24 hours a day, six days a week, the Fed is busy clearing checks. The Federal Reserve System handles over one third of all the checks that are cleared in the country. Checks may be scanned for important information that the bank requests. The Fed provides two types of these services. The transfer of funds service is used to move large monetary balances between nearly 8000 institutions. The automated clearing house or ACH service is used to move smaller and recurring financial transactions like monthly bills. Instead of having to write a check to the mortgage or insurance company, for example, the proper amount from your account is electronically deducted and then added to the account designated by the mortgage or insurance company. Many businesses use direct deposit for their payroll payments to employees. And the federal government makes many payments through direct deposit, including those to social security recipients and military personnel. Monetary policy, banking supervision and financial services. Once again, these are the three primary responsibilities of the Fed. Responsibilities that determine how the Fed helps to establish a strong economy. From 1913 until today, the purpose of the Fed has remained unchanged to instill confidence in our monetary and economic system. But as the economy and financial system have evolved and new laws and practices have come about, the way these goals are achieved has changed dramatically. Today, the Fed clears over 20 billion checks a year. Can you imagine clearing them like this? Seems almost impossible. But with electronic scanners and automated equipment, the process is not only faster and more accurate, it's also less costly and safer. Today, the Fed is continuing to develop new and more efficient ways of conducting business. Ways that depend on the use of evolving technologies. Here, for example, the Fed uses an advanced data communications network and the latest data processing systems to handle electronic payments. Well, as you've seen, the Fed has been around for a long time. During that time, a lot of things have changed. Things will continue to change. But as you've also seen, the Fed adapts to the times that does what's necessary to foster a healthy, growing economy. Emerging democracies from around the world use the Fed as a model. A model to help them develop their own monetary policy to provide for price stability, economic growth and better living standards for their citizens. Because when it comes right down to it, the real purpose of the Fed is to provide trust in our nation's money. This requires price stability. The foundation for a stable but vibrant and growing economy. To keep prices steady, as we've mentioned already, to keep jobs and production both coming, the job of the Fed, when all is done and said, is to keep the economy humming. I'm Charles Osgold. Thanks for watching.