The Federal Reserve System was established to regulate the flow of money and credit in the economy and provide stability. Central banks are the lenders of last resort and can provide credit through a number of mechanisms when private lenders have stretched their lending capacities to the limits due to reserve requirements.
Banking functions, whether actually provided by a bank or not, are at the very core of the modern global trading system. It is essential, then, to understand how banks work in order to understand trade.
Reserve banking is undoubtedly a necessary and crucial part of modern trade and commerce, it is considerably more debatable that the financial instruments modern banking utilizes are, in fact, secure, and whether or not they should fall under the asset portfolios of banks. The corporate elites of the era, however, felt that getting hold of the nation’s savings and investing it in the stock markets was, in fact, furthering the national interest.
The system’s major functions were to make available to particular industries the increasing savings of society as a whole and to manage periodic crises so as to maintain the existing distribution of income. As the pivot of a social system organized by the requirements of profitable commodity production, the banking apparatus had to be equal to the capacities of commodity production. In the late nineteenth and early twentieth centuries—then as now—this meant being equal to the capacities of the large corporations…. Inter-bank competition for reserves in the pursuit of short-term profit, for example, had to be stopped if “anarchy and chaos in times of stress” were not to destroy a price system under which the profitability of great investment in large fixed capital had become predictable. (Livingston, 1986:227)....................
