How The Federal Reserve System Works In The United States

Every Capitalist nation has a monetary system basically similar to ours. As a consequence, all have developed central banks whose duties are essentially like those of the Federal Reserve, namely, to exert control over the direction and extent of changes in the money supply. The aim of all central banks is also the same. They want to keep their economies supplied with the "right" amount of money. If money supplies are scarce, the economy will …

…whole will have suffered a diminution of its reserves. By selling securities, in other words, the Federal Reserve authorities lower the Federal Reserve accounts of member banks, thereby diminishing their reserves. Thus we see that there are three ways in which the Federal Reserve can increase or decrease the money supply. It can raise or lower bank reserves. Moreover, it can raise or lower the discount rate, and it can sell or buy government bonds.