In 1907, the American economy experienced a banking and financial crisis known as the banking panic
As a result, people rushed to the banks to withdraw their money, which caused the bankruptcy of the banks.
The main reason behind the crisis was the loose monetary policy of the banks that financed the speculators in the stock market
What caused an increase in speculation and manipulation in the stock market?
Which collapsed by 50% of the maximum financial value achieved in the previous year.
At this time, there was no central bank in America regulating the work of banks or controlling the money supply.
The severity of this crisis would have increased, had it not been for the intervention of the businessman and banker "John Pierpont Morgan", who paid with his own money and persuaded the rest of the bankers to follow his example in lending to banks and financial institutions.
After the banking panic crisis in 1907, there were calls for the need to establish a central bank that would regulate the work of banks and lend them in times of crisis and control the supply of cash
The US government established the US Federal Reserve in 1913 by virtue of a law signed by President Woodrow Wilson.
What is the US Federal Reserve?
The US Federal Reserve System (FRS), also called the Federal Reserve simply is the central bank of the United States of America, and the Fed makes its decisions independently of the US government and the president with the expectation that they are consistent with national economic policy.
However, the US Congress supervises the Federal Reserve and its institutions, which consists of the Board of Governors (it includes 7 members who are nominated by the US President and approved by the Senate, and the President and Vice President of the Bank are chosen from among them).
As well as the Open Market Committee (FOMC), which has 12 members (they are the seven members who make up the Board of Governors and the other five are heads of regional banks who do not have the right to vote on monetary policy decisions).
The Federal Reserve also includes 12 regional branches in the United States.
But how do the Fed's decisions affect the global economy?
One of the most important tools that the Fed possesses to support US economic growth is interest, whether by decreasing or raising
The decisions to reduce and raise interest rates aim to control dollar liquidity (i.e., the supply of dollars).
When you lower interest, the goal is to keep people and companies from depositing their money in banks and spending or investing it, which stimulates growth.
When the interest rate is raised in order to reduce inflation, the Federal Reserve tempts companies and individuals with the high interest in banks, so they deposit their money in them, and the market liquidity decreases, spending and demand for goods and services weaken, and then prices fall.
In reaction to this strong influence of the Federal Reserve on the dollar, all economies that value their exports and goods in the US currency, such as oil and gold, are affected by the price and movement of the dollar.
As a result, we find many central banks around the world following the Fed's example in its decisions, whether to reduce or increase interest rates.
Another point that reflects the role of the Federal Reserve is that countries that pay off their debts are often in dollars, and therefore, any decision that affects the dollar will be reflected in the economies of those countries and the size of their debts.
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